To tap into the demand for socially responsible investing, asset managers would do well to understand the different approaches that exist even within the market niche known as environmental, social and governance.
For instance, says Impact Assets Managing Director and Chief Investment Officer Fran Seegull, there is the gender lens approach, "focused on investing in women-owned businesses and services that serve women and girls as a way to create return but also move the dial for women and girls.
"We know the education, health, wellness and economic productivity of women correlates with the GDP of a country," she adds.
Seegull and San Francisco-based non-profit Impact Assets work exclusively in the ESG space, offering donor-advised funds to guide institutional investors and high-net-worth clients in their philanthropic efforts.
Firms, she says, should heed demand for socially responsible investing, a sector whose assets have grown from $3.74 trillion in to $6.57 trillion last year, according to the Forum for Sustainable and Responsible Investment.
Given the concern the industry has with reaching millennials and preserving wealth, Seegull adds, it should consider the approach - a Morgan Stanley report estimates 84% of millennials are interested in socially responsible investing, and female investors control an estimated $11.2 trillion in such assets.
Speaking with Money Management Executive, Seegull discussed the opportunity socially responsible investing provides firms to retain and even gain investors and how firms can ensure fund offerings meet sustainable investing standards.
How involved are large institutional investors in impact investing?
Just to define it - impact investing is a practice that creates financial return as well as social or environmental impact. Those of us in the space believe you can get exposure to impact investing across asset classes from cash to fixed income, public equity markets to private debt and equity and real assets.
The U.S. Social Investment Forum came out with a study in 2014 that says $6.5 trillion of U.S. assets are invested in impact investing, up 70% since the last study in 2012. So assets are certainly moving, there's growth in the sector.
What is driving that growth?
Growth is being driven in large part by social and environmental driving forces that are irrefutable and are shaping the world. We have population growth - there are 7.5 billion people on the planet today and demographers say there will be 9 billion by 2050 - and that growth will largely be in emerging markets. We have increasing incidents of poverty and limited access to fresh food and clean water. We are experiencing domestic drought, climate change, aging infrastructure.
So in the impact investing world, we see these social and environmental driving forces as an opportunity to make an impact as well as to make returns.
The other thing we're seeing, and this would be relevant for pension funds, is there's a $40 trillion wealth transfer coming in the next 30 to 40 years. Seventy percent of that money can be transferred to women, as women typically outlive men, and also to millennials. We know that three-quarters of women and millennials factor values into their investing decisions. So, we see there is a real change afoot in who owns assets and how they think about investing and how they think about the world.
There are pension funds like CalPERS that are progressive in seeing the future around impact investing and so they have invested a fair amount of money in community development, financial institutions, affordable housing and clean tech in California as a way to create impactful returns as well as financial returns for their pensioners. Again, keeping on the theme of pension funds, the wealth owned by pensioners and the wealth owned by the U.S. and beyond is changing.
What's the importance of this change for the asset management industry?
We know that any time there is intergenerational wealth transfer there is asset attrition for wealth advisors. Studies show that when a patriarch passes, 50% of the accounts will change wealth advisors and when the matriarch passes the incumbent wealth advisor has a less than 5% chance of retaining the family wealth.
If you are part of a wealth advisor platform, [it's worth] thinking about this asset attrition from wealth transfer and coupling that with the idea that three-quarters of women and millennials care about the values of their investments.
We're not positioning impact investing as a silver bullet to stem the tide of asset attrition, but we think that it's a way to engage the next generation around investing ... You can see these big institutions -J.P. Morgan did report in 2010 about impact investing as an asset class - you see these incumbents, they're doing this for a reason and it's because they see that the world is changing and they also see that the appetites of asset owners are changing.
The Rockefeller Brothers' funds, heirs to Standard Oil, recently have decided to divest from fossil fuel and invest those proceeds in clean technology; wind, solar and other innovations. That's a wonderful example of a generational wealth transfer where people are starting to rethink the whole notion of value.
How have you evaluated the fund industry's reaction to demand for ESG?
I think it takes someone at the top of an investment bank to see this as value add, but they need to hear it from clients.
For example, Cambridge Associates started their investment practice back in 2007 at the behest of the Kellogg Foundation and the Annie E. Casey Foundation. Those foundations said, 'We want this, and we'll leave if we don't get it.' And that's really what it takes. It takes asking, but if these big institutional AUM individual families say they want this or they will go elsewhere, that sends a message.
I think wealth advisory firms are reacting, as are the private equity shops who see the correlation between ESG factors and their portfolio companies, and see that's value creation. To us, that's a perfect storm when you can have the returns as well as impact.
The wealth advisors are incentivizing to do the same thing. They tend to go into the same types of products; a new strategy or a new asset class is different. When you look at the adoption curve of hedge funds, it takes a while for the incumbent wealth advisor community to embrace and incorporate new offerings.
I think there are a lot of pure play shops that are getting out ahead of things. There are a handful of advisors that are ahead - they tend to be more boutique in nature and less of the incumbent platforms. I think BlackRock and Bain are clearly reacting to something they're hearing in the market.
What criteria should be met by a fund claiming to be socially responsible?
I would say that the answer is slightly different for public securities versus private securities. On the public security side there are different schemes, Bloomberg has an ESG screen, and different ways to cut the universe of securities that are sensitive to the interest of the client.
If a client is very sensitive to climate change, for example; you might set a certain threshold or minimum of an environmental score. So there, Bloomberg or some other scheme that does ESG scoring, might look at everything from the supply chain of a company, the products that they offer, their practices around recycling and other things.
It's also important to note that companies like Wal-Mart, if someone's an environmental investor, Wal-Mart might be an appealing stock. You would buy into Wal-Mart and vote your proxy and engage in shareholder actions as a way to incent management to act in accordance with your value system. There is typically a shareholder action docket that a mutual fund does on behalf of shareholders.
On the private debt and equity side, I think there are also very specific investment themes. We invest in a firm in Bethesda called MicroVest that does micro finance investing - they invest in micro financing institutions and emerging markets throughout Asia, Africa, Latin America and Eastern Europe, and they have a short duration fund product that invests in very short tenure debt. That is a debt product that offers monthly liquidity and we feel offers a risk adjusted rate of financial return. And if you care about livelihood of folks at the bottom of the pyramid, that's a great way of getting at that.
If investors were to invest in private debt and equity products, usually the minimums are pretty high: $500,000, $1 million, and for institutions it can be $2 to $5 million, so we're bringing these micro-finance and global sustainable agriculture products to market that drive down investment minimums so the average investor can get exposure to them.
We work a lot with wealth advisors to ask, 'What are the barriers?' Part of it is, 'Where is the product? Show us a critical mass product.' We do a lot on the field building side to give manager ideas through databases that we have, but we're also developing products trying to lower the barriers to capital flows. That's our mission: increase the flow of capital and impact investing through innovative structures, as a way of turning on the tap of impact investing amongst institutional and retail investors.
How do you explain the investment horizon in terms of return?
On the private side, it depends on the offering. The micro restructuration fund product that I mentioned has monthly liquidity; there are some caps on monthly liquidity but it's monthly liquidity. They're at a critical mass enough now that they can honor redemption requests.
For the private equity fund, it's a typical venture capital firm with a 7-to-10-year-lockup with a couple of single year extensions and they harvest the way Kleiner Perkins harvests over time.
For our investment notes that impact assets as bringing to market, the maturity is five years. So, we'll be managing loans so that the maturity at 60 months will pay the principle back. It's the same as you would expect in a lockup in a hedge fund or a lockup in a traditional venture capital firm. It's structured the same and the lockups are the same.
How do we measure social impact investing? What's the benchmark for that? How do you qualify that?
These funds report quarterly and they typically report annually on impact returns. It just takes a little bit longer to measure. There are some immerging standards around impact metrics. The defacto standard is called IRIS (Impact, Reporting and Investment Standard). The notes that we're bringing to market will report to investors annually according to IRIS metrics. So, we do bring all the financial discipline that you would expecting a traditional product. We also have the added aspect of measuring and reporting on social and environmental impact.
There's always a concern about fees eating into funds intended for causes. How does your firm address that?
We have accounts from $5,000 up to $25 million and these are folks that have chosen us over Schwab or Fidelity in part because we give values aligned with investment choices across asset classes.
There is definitely a fee layer with donor advised funds. We have a base fee that is a little bit more expensive than Schwab or Fidelity but we feel like we are delivering a particular type of value.