The field of impact investments is growing rapidly – as the 2016 SIFMA Year in Review notes, U.S. based socially responsible assets more than doubled between 2012 and 2016, from $3.74 trillion to $8.73 trillion, and this market could reach $10 trillion by 2050.
The term was coined around 2007 at The Rockefeller Foundation to refer to investments that do well and do good, generating both financial return and positive social and/or environmental impact. The appeal is understandable when you look at statistics such as a recent survey by the Global Impact Investing Network and JPMorgan which found that 55% of impact investments have competitive, market rate returns, and that portfolio performance for these investments overwhelmingly met or exceeded investor expectations for both financial and social or environmental impact goals.
At the start of 2016, the Washington-based US Forum for Sustainable and Responsible Investing reported that this category totaled $8.72 trillion, accounting for about one fifth of all managed interests. But who is driving this growth?
Last year, the U.S Trust Insights on Wealth and Worth Survey found that over 85% of high net worth or ultra high net worth millennial respondents were interested in or have already engaged in social impact investing. As U.S. Trust investment strategist Jackie VanderBrug explains, “Philanthropic dollars are just not enough to solve social challenges. Young investors have greater confidence in the private sector to resolve them. It is a combination of an acute sense of the needs of the world and the unprecedented belief of what capitalism can do.”
Another recent study corroborates these findings. Published by OppenheimerFunds and Campden Research, Proving Worth – The Values of Affluent Millennials in North America, discovered that 64% of millennial respondents were interested or very interested in impact investing. “Millennials want to do good,” says Ned Dane, Head of the Private Client Group at OppenheimerFunds. “They are using their family wealth to solve world issues.”
The amount of this wealth is staggering – as the Harvard Business Review reports, this generation is “poised to share in the largest intergenerational wealth transfer in human history” – an estimated $41 trillion in the United States alone by 2052.
On the opposite end of the generational spectrum is the other major driver of the growth of impact investing: pension funds. The California Public Employees’ Pension Fund (CalPERS), for example, with over $300 billion in assets, has been pursuing Environmental, Social, and Governance (ESG) priorities across all its investments to ensure it meets the retirement needs of its 1.8 million members. Last summer, it adopted a six-point ESG 5-Year Strategic Plan to define the future of these investments, and other large state pension funds in the U.S. and around the world are pursuing similar initiatives.
At the end of 2014, $2.7 billion of the $8.31 trillion (or 32.5 %) held in private retirement plans was invested in funds marketed as being “socially responsible”, according to the U.S. SIF Foundation, the Forum for Sustainable and Responsible Investment. This is set to change, however. In 2015, the U.S. Department of Labor clarified its policies to make it easier for private-sector employers to include socially responsible investment funds in their pension plans. They are also being increasingly pursued as a less risky long-term investment option, a very valuable feature for those planning for retirement. As a recent Harvard Business School study found, the share price of companies implementing sustainability programs performed nearly 50% higher than a comparison group over 18 years.
As investors increasingly ask for impact-based opportunities, major banks are responding by offering dedicated products. As The Economist reports, over the past two years BlackRock launched its “Impact” division, Goldman Sachs acquired Imprint Capital (an impact-investment firm), and both Bain Capital and TPG have introduced impact funds. Impact investing is moving from a fringe practice to the new normal for millennials and pensioners, and knowing how to navigate this landscape to identify opportunities that are meaningful and lucrative will bring advisors growth in both customers and returns.