Impact investing is rising on the agenda of high net worth individuals (HNWIs) – with an estimated market size of nearly USD 114 billion invested assets.
While not a wholly new area, HNWIs do increasingly seek more formal support structures to help them align their financial objectives with their personal values.
Indeed, client demand is encouraging industry players to think more innovatively in this area. However it is also taking advisors and wealth managers into unchartered territory as the debate around how impact funds should be deployed, and their successes measured, continues.
For example, following a recent CHE40 billion increase in sustainable investments, UBS announced its strategy to become the ‘go-to-firm’ for clients seeking sustainable or ‘socially good’ opportunities. According to Stephen Freedman, UBS’ Head of Sustainable Solutions, these investments now make up approximately 35% (CHE970 billion) of the bank’s total invested assets.
However Mr Freedman does also go on to say: “There is this misconception that there is a trade-off [between] a firm having to pick between either sustainable investment solutions or the most profitable investment solutions; but the fact is sustainable investments are profitable investments.”
This is a bold statement to make, given that research has long engaged in a discussion whether impact can be achieved alongside a financial return. Recent findings by Stanford Social and Innovation review suggest that the most impactful social enterprises are likely to generate only low-single-digit financial returns even in developed countries.
Moreover, the paucity of data on past performance, and the varying definitions of ‘impact investing’ make it even more challenging for wealth managers to confidently lay claim to such statements.
However, before the industry matures and establishes a common standard, the way to go forward is to engage in conversation with HNWs to determine what their priorities in terms of impact vs. return are. As Harvard business review suggests, it is important to map relevant impact opportunities in conjunction with return and risk objectives to ensure that expectations remain realistic.
The Rockefeller Foundation, a global philanthropic Goliath, wants to help resolve these by first and foremost replacing the so far mostly anecdotal evidence with data driven solutions that objectively track performance. It is also looking at more innovative financial solutions to help attract and mobilise private sector capital towards solving global challenges.
Lack of clarity around impact or return should therefore not deter wealth managers from crafting propositions for their clients in this still relatively nascent field. Both from a product and advice perspective, the key is to remain transparent and, where possible, explain the limitations of what can realistically be achieved in a given context.
Moreover, the industry needs to help HNWIs articulate their guiding principles as well as explain what possible frameworks could underpin the investments they seek to make.
Ultimately, the time has come for the industry to grapple with these issues, because it is the industry’s responsibility to lead.
News from the world of wealth:
Credit Suisse looks to make an impact with new investment wing – Reuters
Australia Launches its First Live Impact Investing Database – Pro Bono Australia
UK wealth managers get French rival – FT Adviser
UBS Invests Hundreds of Millions in Digitization – finews.com
Fintech firm opens up ‘elite’ investments for wealth managers – Citywire – Wealth Manager
Thought of the week:
”What you do has far greater impact than what you say.” Stephen Covey
Author: Denisa Pritzova, Analyst
Background: Originally from Slovakia, Denisa completed her studies in the Netherlands before moving to the UK. She speaks English, German and Slovakian fluently. She joined Scorpio after completing various internships including at RBS and the British Embassy.
Education: Denisa holds a Joint Master’s degree in International Business from Rotterdam Erasmus University and completed her Bachelor’s degree at Maastricht University in the Netherlands. During her studies she had the opportunity to spend a semester abroad at TEC de Monterey University in Mexico as well as at UCD Business School in Dublin.
And at the weekends: Denisa likes to escape the hustle and bustle of the city, and go hiking or cycling. She also enjoys anything that involves music, and is always looking for an opportunity to go ballroom dancing (or any dancing really!).