Avoiding the resource curse through investing: A crash course on sovereign wealth funds at home and abroadRead More ›
Private Wealth and Impact Investing: Challenges and Opportunities
In my last post, I argued that private investors make for great partners to advance impact investing. However, a majority of wealthy individuals and families are either still unaware of the opportunities out there or reluctant to expose their wealth to this new way of investing. Why is that so? Let’s have a look at some factors why private investors may still hesitate to get engaged in impact investing.
To begin with, high-net-worth individuals are the centre of attention for a whole range of businesses, charities and other organizations. Many private investors have to build screens and start filtering outside requests or solicitations for this reason. As a consequence, questions of wealth, investments or philanthropy are often addressed within a small circle of trusted relationships, typically including family, peers and longstanding advisors.
For a fairly young idea such as impact investing, it is difficult to penetrate such close-knit, often informal circles of trust. Unlike mutual funds, publicly listed corporations, pension funds or development institutions, wealthy individuals don’t have to publicly disclose the size of their assets or their investment strategy, and don’t usually have publicly accessible websites with a contact page. This complicates identifying potential impact investors and may explain why impact investment activity by private investors is often based on them pulling opportunities, as opposed to there being a market push.
Also, there is rarely an incentive for financial advisors to propose a new way of investing that can potentially lead to more risk or reduced returns. Indeed, impact investing professionals often experience existing advisors as obstacles rather than enablers. Incentives for financial advisors typically revolve around trading frequency, generating attractive returns and placing specific products as defined by their sales departments. Unless impact investing products are able to become part of this sales push or the advisor independently sees value in marketing them, traditional financial service providers will remain a bottleneck.
Beyond that, the problem remains that impact investing constitutes a relatively immature investment philosophy. There is still confusion about what impact investing means. Also, investors may be sceptical as its underlying principles and methods have not been as thoroughly exposed to financial market dynamics as traditional ways of investing.
Thankfully, that is not the end of the story. There are also certain trends that will benefit the emergence of impact investing.
Most importantly, a generational shift is visible. Millennials tend to see societal benefit as a core business challenge, which is one of the reasons younger generations are often considered champions of impact investing among private investors. Considering that the Baby Boomer generation is estimated to pass on 41 trillion US dollars to Generations X and Y over the next 40 years, this has the potential to become a major driver for social finance.
This increased interest in business creating positive impact has also led to impact investing becoming a tool to strengthen family coherence and inter-generational dialogue by asset owners who aren’t necessarily interested in the topic themselves. This is important to remember when working with families and family offices.
Impact investing is likely to benefit from prominent individuals – particularly entrepreneurs – launching high-profile initiatives, like Jeffrey Skoll’s Skoll Foundation or Pierre Omidyar’s Omidyar Network. These examples are important because they showcase impact investment as an attractive engagement area for seasoned entrepreneurs to make good use of their business acumen and wealth. They also have a trailblazer role in creating credibility for the sector. The KL Felicitas Foundation’s review of its own impact portfolio is an excellent example of this.
A third driver of impact investing among private investors is the insight that strictly separating investing and charitable giving produces significantly less impact than a blended approach. This insight is at the root of Canadian institutions like Renewal Partners, the Endswell Foundation and Tides Canada.
Leading more investors towards impact investing has its challenges in an inherently private context. However, knowing what those challenges are and being aware of some highly supportive trends is the key to tapping this wellspring of potential. In the next post, we’ll have a look at what can be done to seize those opportunities.