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Is impact investing effective? Here’s one for the skeptics

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Investor education continues to be a critical function for investment firms seeking to manage impact-focused capital, even as we approach ESG/Impact 2.0. Despite the rapid growth in ESG and impact investing, educating stakeholders who believe in a purely returns-first investment approach is going to be more important than ever. Srin Sridharan, Managing Partner at Thought and speaker at SuperReturn US West, goes though the storyline he uses to help educate returns-first investors, by focusing on the business case of investing for impact.

When you are immersed in the impact world daily, the fundamentals of ESG & Impact Investing are seemingly well understood by all. But educating returns-first investors or general skeptics of “social finance” will always be necessary.

That is not to say skepticism is wrong - it is still well warranted. We have made decades of progress, but this industry is evolving before our eyes – definitions, investment products and the future of the industry all remain in flux.

To help move through skepticism easily, we found it helpful to craft a succinct storyline that focuses on the business case of investing for impact.

Consider the following storyline you can use to make your case:

The Size / Growth is too much to ignore

Whether you are new to the space or simply skeptical, the trends are impossible to ignore. The growth of the “social investing” industry warrants your attention. The North American investor demand for any type of impact-focused investment product has grown rapidly and is now an integral part of the North American investment industry – there are no shortage of statistics proving this.

What is the cause of this growth?

It’s not a fad – it’s a fundamental shift in capital. This growth is being driven by the largest intergenerational wealth transfer in North American history, and the recipients of this wealth care about investing for both financial and social returns:

  • In North America, over $31 Trillion in assets will pass from baby boomers to their millennia heirs over the next 30 years – and it has the power to change many traditional investment norms.
  • These millennials are 2x as likely to factor social investment criterion in their investments than baby boomers were, and their interest is driving (a) where they invest their money and (b) where they spend their money.

Point being - millennials are backing their intentions with their dollars, both in how they invest and how they spend their money.

This interest is beginning to translate into direct business benefit

Businesses with strong performance on environmental, social & governance (ESG) factors are seeing a relative lift in both their margins and their valuations compared to their peers. Industry experts are starting to see correlations between margin and ESG performance, as well as a rise in valuation premiums for companies within ESG topics as well. For example, Boston Consulting Group’s Total Societal Impact studies have shown these correlations to be clear.

So, to sum up...

  • It’s too big and growing to fast for any investor / asset manager to not care.
  • This is not a fad – this growth is due to a fundamental demographic shift in capital.
  • The people who are inheriting this capital, CARE about social and environmental factors, and they’re backing this up with their dollars – both how they invest and how they spend their money.
  • Businesses are starting to see the direct benefits of this. Businesses with strong performance on environmental, social & governance (ESG) factors are seeing a relative improvement in both their margins, and their valuations.

What does this all mean for the experienced impact-investors?

Revisiting this storyline helped reminding us of a few critical points that are valuable to remember, even for the most experienced of impact investors.

1. Tracking, analyzing and reporting the progress of relative margin performance of impact-focused companies will be paramount.

It is very promising that we’re starting to see correlation in margin performance and strong performance in ESG topics. Seeing these patterns persist will be critical to the sustainability of this industry in the long term.

The more proof that millennials are actually rewarding companies with their spend means:

  • the faster business financial performance will follow and,
  • the faster valuation premiums will be earned and justified and,
  • the faster investors and capital allocators will expedite their progress in new impact investment products, processes & infrastructure.

Perhaps this needs to be our leading indicator?

2. When assets change generations, asset managers lose – is simply offering better products under existing asset management brands sufficient? Or does Impact Investing need new brands to lead the charge?

When assets change generations, asset managers typically lose 70% to 80% of those assets. We simply wonder if traditional asset management brands who position themselves with impact-focused products and forward-thinking innovations will suffice, or if they instead need to incubate, create or work with brand new, authentic impact asset management brands.

3. An “omni-channel” approach to asset management may be needed to manage the transfer.

Asset managers need to develop strategies to work with both the transferor (the baby boomers) and the transferee (the millennials) through this wealth transfer at the same time. The challenge of course is that the channels and approaches for these segments are so different. Having digitally focused, authentic, impactful product offerings that are focused on millennials, while at the same time, helping educate/transition baby boomers to understand the rationale and logic of responsible / impact investing will be critical.

In summary, as the next wave of progress from the ESG/Impact 2.0 wave hits us, we need to be prepared to educate efficiently and manage stakeholder buy-in constantly. It’s worth doing to further our investment mandates, remind ourselves of where our focus needs to be to improve ESG/Impact infrastructure, and keep us aligned on a impact-driven mission.

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