The ability to create positive impact through investments has mainly been the preserve of private markets, but is expanding into other asset classes
Shareholder voting and robust corporate engagement, be it directly with a specific firm or in collaboration with other stakeholders, potentially allows asset managers to build globally diversified impact investment strategies in public markets. These solutions may generate change at scale and be employed in core allocations in client portfolios, says Daniel Wild, Bank J. Safra Sarasin’s chief sustainability officer.
This is game changing, as the largest number of impact strategies have, so far, been in illiquid private markets. This is where impact investors can more easily apply the principles of ‘intentionality’ – an intentional desire to contribute to measurable social or environmental benefit; ‘additionality’ – an increase in social or environmental benefits that would not have occurred without the investment; and measurability.
But illiquid investments in private markets are not suitable for all clients’ risk profiles and while having a crucial role in meeting sustainability challenges such as ‘net zero’, may not be easily scalable.
Today, there is “a lot more capital deployed for intentional impact than ever before”, but size and lack of track record for private equity impact funds remain an issue, says Andrew Lee, global head of sustainable and impact investing for UBS Global Wealth Management’s chief investment office.
“Smaller and emerging impact general partners can find it challenging to raise capital at the scale they seek, as capital disproportionally flows to larger firms that are more familiar with institutional investors and wealth platforms,” says Mr Lee.
High-conviction, growth-oriented thematic strategies, such as electric mobility or alternative energy, may also appeal to clients as impact-aligned strategies, says J. Safra Sarasin’s Mr Wild. But they tend to be concentrated in specific sectors and firms, are volatile and more suitable as satellite allocations in diversified portfolios. They generally work well in combination with broader, environmental, social and governance-integrated core allocations, he says.
Filling in the gaps
Increasingly, though, investors want to generate positive impact across their entire portfolio, and in the liquid space, across asset classes, sectors and geographies. “I believe we should offer sustainable and impact-oriented investing across all asset classes, and different investment solutions will be suitable to different phases of a market cycle,” says Mr Wild.
The long bull market before last year’s correction put the spotlight mostly on growth-oriented, sustainable thematic strategies, which outperformed in recent years but have recently suffered in an environment of rising interest rates and risk of recession. Today, investors focus more on defensive asset classes, with high dividend strategies having recently regained popularity, he adds. It is important to offer these solutions in the sustainable and impact space too.
Despite rising demand, Mr Wild believes “there are not enough viable solutions” on the market that meet client needs for products generating both impact and market rate returns. Most clients do not accept any impact-return trade-offs, he explains, calling on the financial industry to develop more transparent, attractive solutions that offer sustainable impact alongside financial returns.
“Having a broader application of impact across industries and asset classes would allow investors to pick impactful investments without having to give up their financial convictions,” states Mr Wild.
Tipping point
Impact investing represents a fraction of the asset management industry and faces challenges around data availability and lack of standardisation in impact reporting, as well as impact washing and ‘mission drift’.
But Amit Bouri, CEO and co-founder of the Global Impact Investing Network (GIIN), is confident the sector is reaching a tipping point, supported by macro-trends, including shifting public attitude towards global sustainability challenges such as the climate crisis. “We are just beginning to realise the full potential for how companies can drive positive impact in the world,” he says.
While it is “incredibly important” to help businesses grow and thrive and facilitate the journey from venture to listed companies, fund managers can and should drive impact in the listed space too, to meet client demand for a total portfolio approach, he adds.
“Our industry has gained greater experience and track record, with enhanced impact measurement tools being more broadly adopted,” enthuses Mr Bouri. “Greater sophistication means greater demand for impact investing solutions. This represents a huge opportunity window for the private wealth sector, and the asset management industry more broadly, to move impact investing to the top of their agenda.”
