The demand for socially responsible investments (SRI) is growing, albeit at a modest rate. While blending the worlds of philanthropy and investments can often be challenging as the two areas are seen as being widely disparate, returns from SRI can often match or even exceed traditional investment benchmarks, finds John Schaffer
Go deeper with GlobalData
Private banking clients are undoubtedly some of the most avid philanthropic givers. The majority of the Next Gen clients, in particular, show signs that they will be altruistic in the way they manage their wealth. According to the Stanford Social Innovation Review, 45% of wealthy millennials want to use their money to help others and consider social responsibility as a factor when making investment decisions.
However, blending the worlds of philanthropy and investments can often be challenging as the two areas are seen as being worlds apart. Yet being responsible and making a return from socially responsible investments (SRI) do not have to be mutually exclusive.
Making a solid return
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataReturns from SRI can often match or even exceed traditional investment benchmarks.
Where SRI suffer most is when investors, on the whole, tend to view them as inferior substitutes for traditional investments. According to a 2016 UBS report ‘Impact Investing: Doing well by doing good’ the common misconception in impact investing is that portfolio profits and impact are mutually exclusive – with investors separating investment portfolios into distinct buckets of philanthropy and returns. However, this mindset is slowly changing.
Simon Smiles, CIO, UHNW at UBS, says that although there are clients who are looking towards impact investment to achieve philanthropic goals, the majority are seeking investment opportunities:
“The vast majority of people who we’re starting to see interested in impact investing are interested because they find great investment opportunities – more than any kind of bucketing in a charitable sense. We are diverging from how impact investment has often been approached. There have been many instances where impact investments have unfortunately been presented to clients as – this is something you should do and you might make money. For some clients, that resonates. For many clients though, they get put off because if they wanted to give away money, they have their own charitable endeavours. If they want to invest, they want to invest.
“We’re conscious of the change of that narrative and we’re looking for great investments with really attractive risk/return characteristics, which are also impact investments.”
Smiles adds the impact investing space tends to be the preserve of UBS’ ultra wealthy clients.
“It’s skewed towards UHNWI because often it is based on private structures and large minimums are required. The majority of impact investments involve venture capital and private markets type structures, which has tended to limit those investments to the larger clients.”
Smiles further adds that the proportion of total client assets allocated to impact investments is low – accounting for less than 1% of allocations.
According to the Global Impact Investing Network (GIIN), there can be a range of return expectations when it comes to impact investments, from below market to risk-adjusted market rates. The 2015 Cambridge Associates-GIIN study, broadly confirms that impact investment funds can achieve financial returns in line with traditional funds without impact objectives. However, the study also reveals years of underperformance. For instance, impact funds returned 0.9% compared to the comparative universe returns of 10% between 2005 and 2007.
Sustainable investment is not however limited to impact investments. Sustainable funds that integrate ESG (environmental, social and governmental) targets are more accessible to the wider investment universe. According to the Morgan Stanley Institute for Sustainable Investing, sustainable equity mutual funds had equal or higher median returns and equal or lower volatility than 64% of traditional funds.
Abou Sarr, global head of ESG at Northern Trust, describes the US-headquartered firm’s approach to sustainable funds, and tells PBI that the financial institution has 25 years of experience in managing socially responsible portfolios, with approximately $59.3bn in ESG/SRI mandates globally (as of December 2015).
“We use the Northern Global Sustainability Index Fund as the first step in integrating SRI into a diversified portfolio. The underlying index is the MSCI World ESG Index, a diversified, sector neutral global benchmark constructed using environmental, social and governance (ESG) factors. Many times, clients have an interest in SRI, but are not sure how to do it. When asked about areas of focus – ie, governance vs. environment vs. diversity – they feel strongly about each aspect hence the Fund is a good way to gain diversified exposure.
“As ESG metrics become more integrated within ESG/SRI indices and are not just a negative screening approach, we see greater demand for best in class and thematic ESG indices. “
In the long term, socially responsible funds have performed well. The MSCI KLD 400 Social Index has outperformed the S&P 500 on an annualised basis by 45 basis points since its inception (10.14% compared with 9.69% for the S&P 500; July 1990 – Dec 2014)
The FTSE4Good UK Index has also beaten the performance of the FTSE100 for the majority of a five year period.
The complex philanthropic ecosystem
Russel Prior, head of philanthropy at HSBC Private Bank (UK), said at the PBI London Conference on 15 June that one challenge to overcome is the confusing terminology involved in the philanthropy ecosystem when trying to achieve blended returns:
“One challenge is that of mindsets. It’s confusing when talking about social investment, social impact bonds, social business, social finance – these are all terms that our clients don’t understand because they’re fundamentally in the philanthropic paradigm. If we want to bridge this gap to them, we have to be able to clear this terminology gap. Also, we should not call what is fundamentally a loan a social impact bond or some other confusing terminology – but that’s what’s currently out there.”
Prior adds that while starting to think about blurring the lines between philanthropy and investing, understanding the world of regulation is imperative.
“It’s great being in the philanthropy world because it's largely unregulated. Clearly, regulation is a lot more fundamental in the investment world. But you have got to understand what's going on.
“Of course you have all of the same issues – suitability, selection, performance and monitoring. In the investment world that's well developed. In the philanthropy side of it that's less developed. So how do you say to an investor in your social investment bond – we are going to track, monitor and deliver to you the social impact performance – that's really quite demanding. The philanthropy world hasn't necessarily developed to a stage where it's ready to do that. It’s an important point to consider as this blended world moves forward.”
A nascent market
According to a 2015 report by the Morgan Stanley Institute for Sustainable Investing, Understanding the performance of sustainable investment strategies, in 2012 $1 out of every $9 of US assets under professional management was invested in some form of sustainable investment, primarily in public equities. In 2014, that number increased to $1 out of every $6 – to a total of $6.57trn currently invested sustainably.
The area of impact investment, in particular, is consistently gaining traction. According to a JP Morgan/ Rockefeller Foundation report, Impact investments: An emerging asset class, the amount of current assets under management devoted to impact investing is estimated to reach between $400bn and $3trn by 2020.
However, although these figures are impressive, they pale in comparison to the wider universe of wealth management. According to PwC, total assets under management are expected to grow to $102trn by 2020.
Sarr tells PBI that the overall demand for SRI in Northern Trust’s private banking division has been brought about by two main global factors. “Firstly – broad interest in ESG investment themes, this includes low carbon strategies and faith based investing.
“Secondly, generational wealth transfer is a major factor. Approximately 90 million millennials are set to inherent $30trn from baby boomers over the next few decades. Overall, millennials seek to make a positive social and environmental impact with their investments. Approximately 67% of millennials believe investments are a way to express social, political and environmental value (vs 36% of Baby Boomers).”
However, Smiles, UBS, tells PBI that millennials’ attitudes towards the area will not necessarily be the key driver for the future.
“There’s not actually a huge amount of wealth yet in the millennial space. Obviously as we fast forward into generational money transfer, millennials will inevitably inherit a large amount of wealth. But who knows how their attitudes will change over a 20-year period.
“I think growth drivers will be twofold: It will be more firms taking the approach we at UBS have, which is trying to find great investments that also have a material, measurable, verifiable, and internationally positive impact on society. ESG is directly linked in many cases to immutable structural trends – population growth, development, ageing, and such. Put all that together and there are a lot of compelling investment opportunities in this space.”
Smiles adds that by “broadening” the definition of impact investment – by making it accessible through more associated financial products – the area will grow naturally:
“The other area that will lead to a measured amount of money in this space is firms taking a different approach and simply changing the definition of what an impact investment is, and there are a number of firms that have already done that. If you change the definition into a much broader sense of what impact investing is – by definition you will end up with more money being measured as being an impact investment.”
