By Ali Caffery and Lauren Janus
Impact investing, or the practice of intentionally aligning clients’ investments with their values, is centered on the philosophy that capital can be a force for positive change. Impact strategies often focus on environmental, social or governance (ESG) factors by screening out the most harmful industries, while proactively engaging with companies to address these issues.
Impact investing is on the rise. In fact, the US SIF Foundation: The Forum for Sustainable and Responsible Investment estimated that as of 2016, more than $1 out of every $5 under professional management was invested in sustainable or responsible strategies. Investors often assume that impact strategies are available only to large institutions and foundations, but ESG investing is increasingly accessible to individual investors through many low-minimum investment vehicles, including ETFs, mutual funds and even fully diversified portfolios.
As impact investing gains prevalence and captures investors’ attention, financial advisors will be expected to support their clients’ demands for such portfolios.
Broaching the topic of impact investing with clients can be challenging, especially if they’re largely happy with the service you’ve provided them so far. But introducing impact investing can deepen your relationships by broadening the conversation beyond the traditional planning topics to address issues clients care about.
Here’s how to begin the conversation:
1. Look for hints into your clients’ passions. Suppose you’ve been advising a couple—John and Pam—for nearly five years. You’ve helped them set up retirement plans and manage some of their additional assets. The couple has worked hard to build savings outside of their retirement needs, and they enjoy a comfortable lifestyle.
During a recent meeting, Pam mentioned that she’s just joined the board of a local conservation nonprofit. The two of them appreciate their natural surroundings and have talked about increasing their donations to environmental causes as they progress into retirement.
These clues into their strong interest in environmental conservation should highlight that Pam and John are natural candidates for impact investing. You might raise the topic by saying something like:
“I know you both are passionate about conservation. There are ways we can put your investments to work in support of these causes. Would you like to talk about some of them?”
Political or religious views, charitable donations or work history may also provide insight into clients’ values. Ask about their involvement in community organizations and how frequently they travel. They may be outdoor enthusiasts or scuba divers passionate about marine conservation. Identifying and discussing passions is a key first step in proposing an impact investment.
2. Bring up impact investing yourself. Even if your clients haven’t given you clues about their social or environmental interests, you can always take the first step and raise the topic. To a couple like Pam and John, you might say:
“I am really proud of what we have accomplished together in preparing you for retirement. We have met your financial goals and objectives. Let’s talk about your personal values and aspirations. If you are passionate about the environment or other social causes, I can help you address those values within your portfolio, without sacrificing financial returns.”
3. Show them a financial plan that includes impact investing. Showing John and Pam a financial plan that features impact funds that generate competitive returns may pique their interest in the space. A study conducted by Deutsche Bank demonstrated that ESG considerations are correlated with more attractive risk-adjusted returns at the security level, while another study conducted by Envestnet showed that impact-oriented separately managed accounts outperformed their non-impact counterparts by more than 15 percent over a complete market cycle. These studies help illustrate that clients need not necessarily forego portfolio returns to make an impact through investments. Educating investors on impact investing’s potential risk-return benefits may spur their interest.
There are a number of ways a couple like Pam and John can test the waters by dipping their toes into impact investing. One of the easiest ways to incorporate it is through “clean hands” strategies—avoiding the types of investments that run counter to clients’ principles. Pam and John may choose to avoid owning objectionable securities, such as fossil-based energy companies. Other funds may take a proactive approach, such as actively seeking out companies that develop clean energy solutions.
The rapid growth of impact investing suggests more clients are seeking to align their investment dollars with their values. As their advisor, you can take a proactive approach, and demonstrate your value, by starting a conversation to guide them in making the decisions that are right for them. It not only will deepen your relationship with them now, but also strengthen it for the long term.
Ali Caffery is a portfolio manager at Envestnet | PMC, where she handles asset allocation, manager selection and due diligence and portfolio administration for multiple portfolios managed by PMC.
Lauren Janus is the director of Thoughtful Philanthropy, where she creates personalized, independent reports to help individuals understand how they can support the causes they care about.
