HOW TO CREATE AN IMPACT WITH YOUR CLIENTS

By Denisa Pritzova and Hubert Brown in London

High net worth (HNW) individuals now, more than ever before, are seeking to align their personal values with their investments to make an impact. And while sustainable investing is no longer a novel term for investors or wealth institutions per se, clients’ accelerated drive towards sustainability is influencing the investment industry and crucially, changing how it is being regulated.

In a recent conversation with the FT, Tasha Vashisht, Senior Manager at Scorpio Partnership highlighted “an increasing interest in this area, particularly from younger clients who use both head and heart when they make their investment choices”. Indeed, this age effect is so pronounced that a measure of how good a private bank is at offering impact investment opportunities can often be linked to how much it has targeted next-generation clients.

The sentiment is clearly visible in BNP Paribas Wealth Management’s Global Entrepreneur Report 2018, which tracks this shift in mind-set towards sustainable investing among the younger generation of business owners. More than 80% of those under 35, for example, maintain some investments targeted at environmental or social outcomes compared to just 45% of over-55s. Younger entrepreneurs allocate a higher proportion of their overall investment portfolio (8% percent) to sustainable investments than the over-55s (5%).

A growing global social conscious also means that this trend is only going to continue. This is once again most prominently anticipated among the next generation of clients, the majority of whom intend to increase their allocation to sustainable investments over the next couple of years.

 

Source: Bloomberg as featured on the FT

Gauging the social and environmental effects of any business however is much harder than measuring profit. As such, there is increasing demand for support from clients to demystify the terminology and guide them through the various investment options available to them (see Table 1).

 

Table 1: Alternative Bottom Lines

Source: Bloomberg; Global Sustainable Investment Alliance

Some wealth managers are beginning to recognise this is an opportunity for differentiation and evolving their thinking.

UBS, for example, is collaborating with partners outside of the industry such as World Bank and World Economic Forum to develop an independent and open-architecture platform to facilitate sustainable investments. “We have big problems that were outlined by the UN sustainable development goals. There is a role for private capital in addressing these problems,” says James Gifford, Senior Impact Investing Strategist at UBS.

Similarly, last year Credit Suisse set up an Impact Advisory and Finance department to drive its sustainability agenda and is planning to issue its first green bond alongside a framework for how the proceeds will be managed.

The regulator too is stepping in to address the absence of official rules on what classifies as ‘green’, ‘impact’ or ‘ethical’. The European Commission, for example, is preparing new legislation to unify rules on investment classification to avoid ‘greenwashing’ – when an organisation spends more time and money claiming to be ‘green’ than actually implementing policies that minimise environmental impact. This is something the Commission sees as a major issue.

Meanwhile in the UK, a government review  noted that while the UK had been a pioneer in developing the concept of social impact, it has since made limited progress relative to other countries, and highlighted that supply is yet to catch up with demand. The report also suggested that while over half (56%) of UK individuals have at least a moderate interest in impact investment, less than a tenth (9%) have actually invested. The correlation between those who behaved sustainably in their day-to-day life and also invested sustainably was lower in the UK than the global average and below France, Italy and the US.

This suggests that the professional UK wealth community needs to work more closely with the regulator, their global counterparts and their impact focused clients to increase the range of products available to investors in this area. And perhaps the review was the much needed wake-up call for the community, as earlier this year, 18 UK of them committed to increase social impact investment by addressing the challenges identified in the government report.

The aim of their alliance is to make the market more accessible for investors by facilitating investment in impact products, improving deal flow and the ability to invest at scale, strengthening competence within the financial services industry, and developing better reporting around ‘non-financial outcomes’. Development of universal frameworks and robust classification systems will, of course, require time so to maintain momentum the industry needs to continue its focus on creating credibility and demonstrating transparency. This open debate and inclusivity should ultimately encourage both the investment professionals and the clients to more consciously consider the kind of investment strategies and outcomes they want to pursue.

 

Thought of the week: “Someone is sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffet

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