There are a myriad of reasons why affluent investors should consider investing in private companies, argues Matt Taylor, Managing Partner at Rockpool Investments. When thinking […]
Responsible investing has been gaining in popularity for years now, but now “impact investing” is really coming to the fore – for individuals at all levels of wealth. Read on to discover how you might put your capital to work in more ways than one.
We all invest for a purpose, whether that be to meet ever-rising school fees, fund an attractive lifestyle in retirement or pay for a special purchase such as a holiday home or dream car. Unpicking what is really important for your family and crystallising what your financial objectives might be for the short, medium and long term is therefore one of the most important elements of the initial conversations you will have with a wealth management adviser.
Yet in these ever-more socially-conscious times investors are increasingly wanting to take these discussions to an even deeper level, to encompass how they would like their investments to affect the wider world. Enter the concept of “impact investing”.
The notion of investing responsibly so that your money only supports companies and sectors that meet good Environmental, Social and Governance (ESG) standards is now very well developed. In a movement led by institutions like pension funds and family offices, conscientious investors started moving away from “sin stocks” associated with industries like tobacco, weapons and alcohol decades ago; the 1980s also saw many divesting from South Africa in protest at apartheid. In the years since responsible investing has had a meteoric rise, with growth further fuelled by our globalised information culture: ESG assets under management hit $8.7 trillion at the end of 2016, up 33% since 2014.
Responsible investing can now really be thought of as completely mainstream. Wealth managers commonly offer an “ESG overlay” for clients’ investment portfolios allowing them to (negatively) screen out investments that are not in line with the investor’s principles or to (positively) screen in companies that have good records in areas like protecting the environment or employee diversity. However, impact investing allows the well-intentioned to go far further and make sure their money being worked really proactively for the greater good.
It is very important to note impact investing is not charity, but rather real investments intended to generate a solid financial return for the investor as well as a positive social or environmental return at the same time. One example might be investing in a company that innovates profitably in water purification to clean pools in the developed world, but which also works on a charitable basis to deliver clean drinking water in developing countries. In another, an investor might support a government’s development efforts by buying bonds dedicated to funding efforts like prisoner rehabilitation or improving educational facilities. The financial returns on offer may be steady, rather than stellar, but they may still be very attractive – particularly when interest rates are low. Add in the “feel good factor” of know that your money is helping to solve global problems as well as furthering your personal goals and it is easy to see why impact investing is becoming so popular.
Impact investing is still at a fairly early stage, the term only having been coined by the Rockefeller Foundation a decade ago. But already the momentum behind this movement has become huge. Impact investing’s assets under management already total some $60bn, with $12.2bn having poured in last year alone. Some forecast impact investing assets to soar to over $3tn in the next ten years. And it is not just billionaire entrepreneurs and the world’s wealthiest families who are piling into the space. There is huge appetite for making this kind of dual return among investors at all levels of wealth, all over the world.
For their part, wealth managers have been quick to respond. Global banking brands, and not just niche advisers, have been building their expertise and product offerings for some years now. Several big-name institutions have even opened up impact investment opportunities at very modest asset levels. Even those institutions with no specific offering in-house will be proud to source them for you as part of a broad conversation about aligning your financial and non-financial goals.
For reasons of the risk-return trade-off and diversification, impact investments are likely only to form a relatively small part of most investors’ portfolios (although wealth managers will easily construct them entirely orientated towards ESG principles if you so wish). However, being “part of the solution”, in however small a way, is something that really appeals to many investors today.
Caution is warranted, however. Impact investing is a nascent and fairly complex area where taking professional advice is particularly valuable. Translating your principles into investment practice calls for specialist expertise, and a good deal of thought is required to ensure you get the returns – both financial and non-financial – that you seek.
What is certain, however, is that “doing well” and “doing good” can be one and the same thing if you so wish. Private capital is going to play a vital role in helping to solve the world’s most pressing problems, so why not have a conversation with your adviser to see how you could be part of the impact investing story?
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