Three ways financial advisers can incorporate impact investing into their traditional investment portfolios
Standard investment portfolios haven’t changed much in recent years. Depending on who the investor is, portfolios usually hold some variation of fixed income, equity, blue chip allocations, and alternative investments. People who are planning for retirement know they need diverse portfolios, but they shy away from risky investments.
However, that landscape is shifting as young people are urged to opt in to the stock market and move away from the bond investments favored by previous generations. They’re willing to take greater risks for faster, higher returns and are focused on delivering good with their investments.
They also approach philanthropy differently. Young professionals see for-profit social initiatives as more effective ways to help people than simply donating large sums of money.
Enter impact investing. Rather than follow the old modus operandi of creating wealth for yourself and then distributing it as you see fit, impact investing generates returns for investors and for a charitable cause or group. The concept still draws skepticism in some circles, but this form of investing is a natural outgrowth of Millennials’ desire to contribute to society while achieving for themselves.
Profit and sustainability are hallmarks of this generation’s mindset, and impact investing provides an opportunity to satisfy both.
What Is Impact Investing?
Traditionally, investors and their advisers eschewed impact investing because they assumed they’d have to compromise their rates of return in a true financial sense. Societal good counted as part of the return, but that also meant possibly reducing the “real rate of return” in the process.
That’s no longer the case. Impact investments surpass some traditional returns because they’re often earlier-stage and higher-yielding. Alternative investment opportunities may occur with private entities in emerging or frontier markets, so the rewards exceed those from so-called safer bets. Proactive investors stand to gain from having some non-market correlated investments that are less dependent upon macroeconomic conditions and the economic data release du jour.
Impact investing is a product of not only changing societal values, but also decades of increased attention to corporate social responsibility and environmental, social, and corporate governance.
The concept of impact investing really gained momentum in the past two or three years, but the core values have been developing for a long time. Wall Street already recognizes impact investing’s potential, and traditional investing could cross-pollinate with social entrepreneurship. Those mutual interests will propel this sector forward.
How to Incorporate Impact Investing Into Your Portfolio
Because impact investing is so new, companies and investment banks need to create viable impact products. The financial community is already discussing how to stay relevant and provide customers with unique impact opportunities. Firms don’t want to lose their portfolios to more progressive outlets that fulfill investors’ demands for profit and sustainability.
Here are three ways financial advisers can incorporate impact investing into their traditional investment portfolios for the good of everyone involved:
- Develop the infrastructure. The investment community needs assurance that it’s complying with its fiduciary responsibilities. Investment managers want to know which venues and products are compliant with licensing and authorization rules before they recommend them to their clients.
The financial industry needs to broaden its ecosystem and create clear standardization and best practices around impact investing platforms, similar to what my own company, GATE Global Impact, has done.
Investors will be looking for opportunities to have secondary liquidity or access to pre-mergers and acquisitions exits in emerging markets. The financial community must establish the necessary infrastructure and regulatory framework now to meet investors’ demands. The Global Impact Investing Network and the GIIRS and IRIS B Analytics ratings have made some headway in this area, but they’re only a start.
The more these metrics and reporting requirements reflect existing protocols, the faster all parties can ensure compliance and participate in these markets.
- Increase actionable knowledge. Part of developing the right infrastructure is educating investors on what impact investing is and why they should get on board. The financial community must cogently explain the risks and rewards of engaging in these new markets.
Social media helped compress the learning curve for investors, so the interest in impact investing already exists. Now, it’s time to create the products so firms can not only offer them to clients, but also assure them of why they hold so much promise.
- Get mainstream buy-in. Goldman Sachs is one of the biggest names in impact investing, and the corporation’s endorsement will go a long way toward assuaging people’s fears about this field. Bank of America, Morgan Stanley, and The Rockefeller Foundation have also stepped into the impact-investing arena. The financial community should ride this wave of interest to increase investor buy-in and persuade the public of impact investing’s promise and legitimacy.
The rise of impact investing signals a paradigm shift in the financial community. As more young investors prioritize social contribution and personal profit, the demand for impact investment opportunities will rise.
And as more companies create products to meet this demand, impact investments will become part of the financial mainstream. Transistion them into your investment portfolios before you fall behind.
Vincent Molinari is the co-founder and CEO of Gate Global Impact, a leading electronic marketplace platform that’s helping the world’s leading organizations standardize and accelerate impact investing. Vincent is also a managing partner at Constellation Fin Tech, and he consults with members of Congress and regulatory agencies on issues related to capital markets, early-stage companies, and secondary market liquidity.