IM­PACT IN­VEST­ING SET TO BE­COME THE NORM

Pretoria News - - OPINION - KER­STIN ENGLER and TIMM REUTTER Engler and Reutter are se­nior wealth man­agers for the Geneva Man­age­ment Group.

TRA­DI­TION­ALLY, when high net worth in­di­vid­u­als (HNWIs) want to make a dif­fer­ence in the world, they put their money into phil­an­thropic en­deav­ours. But phi­lan­thropy has lim­its. While phi­lan­throp­i­cally funded or­gan­i­sa­tions do good work, they of­ten bat­tle when it comes to scale and ef­fi­ciency.

As a re­sult, a younger gen­er­a­tion of HNWIs is flock­ing to im­pact in­vest­ment in­stead. That is, projects that will ul­ti­mately sus­tain them­selves, pro­vid­ing long-term, scal­able ben­e­fits to the com­mu­ni­ties they serve. Im­pact in­vest­ing in­tends to gen­er­ate mea­sur­able so­cial and en­vi­ron­men­tal ben­e­fits along­side the tra­di­tional fi­nan­cial re­turns, though the lat­ter is not the in­vestor’s pri­mary con­cern.

Rather than cre­at­ing a legacy, they want to in­vest ac­cord­ing to their goals, ob­jec­tives and vi­sion in the present, an aim that phi­lan­thropy as the mere do­na­tion of money to pro­mote a good cause, doesn’t nec­es­sar­ily achieve.

And un­like the once-pop­u­lar So­cial Re­spon­si­bil­ity In­vest­ment (SRI), which merely ex­cludes the in­stru­ments that cause spe­cific eth­i­cal con­cerns, and which is now com­pletely mis­aligned with the needs of savvy in­vestors, En­vi­ron­men­tal So­cial Gov­er­nance (ESG) in­vest­ments tar­get com­pa­nies that al­ready have high ESG stan­dards. Here the in­vest­ment op­por­tu­nity is based on the po­ten­tial these com­pa­nies have to make an im­pact in the ESG space.

One of the main fea­tures of im­pact in­vest­ing is that it con­sid­ers the ESG im­pact above the po­ten­tial fi­nan­cial re­turns. As well as the frus­tra­tion with tra­di­tional phi­lan­thropy, there are sev­eral other fac­tors driv­ing the shift to­wards im­pact in­vest­ing.

One of the big­gest fac­tors is a grow­ing be­lief that in­vest­ment is a vi­able way of bring­ing about pos­i­tive change in the world. The ex­cite­ment around im­pact in­vest­ing is most pal­pa­ble in younger peo­ple in­spired by ac­tivists such as Greta Thun­berg. Ac­cord­ing to re­search from US Trust, part of Bank of Amer­ica’s Pri­vate Bank, 93% of mil­len­ni­als be­lieve so­cial or en­vi­ron­men­tal im­pact is im­por­tant to in­vest­ment de­ci­sions.

An­other re­port by US Trust, mean­while, found that 66% of high net worth mil­len­ni­als work for, or own, a com­pany that in­te­grates en­vi­ron­men­tal and so­cial good val­ues into its prod­ucts, ser­vices and poli­cies, com­pared with just 52% of all high net worth in­di­vid­u­als (HNWIs).

In­ter­est­ingly, fe­male in­vestors tend to have a more pos­i­tive at­ti­tude to­wards im­pact in­vest­ing, with some 65% of wealthy women be­liev­ing so­cial, po­lit­i­cal and en­vi­ron­men­tal im­pact to be im­por­tant, com­pared with just 52% of men, ac­cord­ing to this Max­im­pact Ecosys­tems ar­ti­cle.

It’s also worth bear­ing in mind that in­vest­ing for im­pact means that in­vestors are more likely to look beyond fi­nan­cial data. By tak­ing a more holis­tic view of the com­pa­nies they in­vest in (Are they well run? Do they treat work­ers fairly? Do they have an en­vi­ron­men­tal fo­cus?), they make them­selves less sus­cep­ti­ble to the kind of prac­tices that were at the heart of the 2008 fi­nan­cial cri­sis.

It must also be un­der­stood that in­vestors will not nec­es­sar­ily achieve the same re­turn with these in­vest­ments, although they may have the de­sired im­pact that the in­vestor hopes to achieve.

While in­vestors should en­sure that any project they in­vest in meets those re­quire­ments, they should also look out for reg­u­la­tory mark­ers. Im­pact in­vest­ing has to be sub­ject to AML, KYC com­pli­ance and over­all reg­u­la­tion. This needs to be strictly ad­hered to if im­pact in­vest­ing is to make its mark on the world.

While im­pact in­vest­ing still ac­counts for a rel­a­tively small pro­por­tion of to­tal in­vest­ments, that will change, es­pe­cially as more and more mil­len­ni­als and younger gen­er­a­tions gain con­trol of fam­ily wealth. Far from be­ing a niche form of in­vest­ment, it will in­creas­ingly be­come the norm. In­vestors can in­vest for im­pact with­out com­pro­mis­ing on re­turns or miss­ing out on port­fo­lio di­ver­sity, and the world will be a bet­ter place for it.

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