RBC Wealth Management’s head of portfolio strategy, George King, has long advocated the use of sustainable investing as a tool to enhance client experience for wealth managers. Hazel Biegelsen speaks with him about the recent emergence of impact investing and its vast potential in the HNW banking community
As HNW investors become more environmentally and socially conscious, a growing trend has emerged in the private banking community.
Go deeper with GlobalData
Impact investing has the makings of a winner, being a form of social investing in companies, organisations, and funds to create a measurable social or environmental impact while also generating a financial return. Frequently, the financial return is reinvested in order to promote sustainability of the investee.
Impact investing differs from other types of social investments, like Socially Responsible Investing (SRI). A narrow definition of SRI is investing to generate a return while excluding sectors thought to have negative social impact.
While SRI can be expanded to include an Environmental, Social, and Governance (ESG) risk assessment and even proactive attempts to encourage good corporate policy, impact investing actively seeks to drive long term change.
Philanthropic entities also see promise in impact investing as a way to drive sustainable social change, encouraging more creative ways of raising capital.
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By GlobalDataDespite the buzz around impact investing, however, a section of the private banking industry view social investing as an activity for "hippies only", being sceptical about its ability to actually generate substantial financial returns.
However, George King, Royal Bank of Canada (RBC) Wealth Management’s charismatic head of portfolio strategy, takes a more practical approach – advocating the use of impact investing as a way of strengthening relationships with clients.
The King’s speech
According to King, impact investing helps align client values with their investments, and that "if you’re not focusing on alignment, you’re alienating your clients".
Client values, undoubtedly, include ‘making an impact’. In a survey included in the 2014 World Wealth Report (WWR) by Capgemini and RBC Wealth Management, 92% of HNWIs around the world cite having a positive social impact through their investments as "important" to their decisions. It is "very important" or "extremely important" to more than 60% of the HNW respondents.
King also considers social investing as "state of the art on the asset management side" and says that, since it often involves an ESG risk assessment, it can exclude risks of adverse shocks caused by environmental crises or increased regulation. After all, "sustainable investing is not just about trying to save the world".
RBC’s approach
According to King, RBC differs from other banks in the approach it takes towards impact investing.
Instead of being product led or having a single specialist team, RBC is client led. It is part of a broader conversation each relationship manager and banker has with their clients about values.
"It’s us going to them and saying ‘it’s part of our job as an advisor to ask if you care about these things,’" says King.
The approach is all about allowing clients to navigate the "complicated industry of social investing" without imposing a specific viewpoint.
"We’re not trying to set up a stall that says ‘this is what we think is important, or better, or newer, or more effective,’" adds King.
Roadblocks
While King believes this to be the best approach, he says it’s not without its challenges. He identifies the three biggest roadblocks as: clarifying the definition of impact investing among bankers and clients, the time-consuming nature of impact investing, and the availability of products.
Impact investing is a complex industry, and communicating its details successfully with clients can be difficult. If each banker is not trained to understand all the nuances in the conversation, they can mishear or misunderstand the client, and even misrepresent what the bank is capable of.
There is a range of impact investment types, including social impact bonds, private equity structures, venture philanthropy, green bonds, microfinance, and funds designed to tackle specific social or environmental problems. Since everyone approaches the space from a different background, it is essential to clarify exactly what a client is looking for and what best suits his or her needs.
A client with a philanthropic background may struggle to understand how investing can enable them to reach goals, while another may view social investing with an old understanding of SRI as making less money – avoiding sin investments.
While essential, the task of training each individual banker to have the appropriate conversation with clients is difficult. Following up with each client thereafter, and providing suitable investment options, alongside providing appropriate documentation, is a time consuming process.
Even if the conversation is executed perfectly, it may not be possible to give a client exactly what they want.
King also says that the range of available investable options is not yet complete, and every problem does not have an impact investment solution.
"The availability of appropriate and available options is still very small, so in that sense there’s certainly a lot more to say than there is to do," says King.
Despite the challenges, King says what impact investing ultimately does is to provide a value added solution for clients.
"I think there is no question that where impact investing works and fits, it enhances the client experience and that they have better alignment of their values and their investments."
Making an impact
While there has been controversy around the effectiveness of impact investing in tackling social and environmental problems, King believes it has the potential to make greater long term impact, particularly in comparison to pure philanthropy.
King says while philanthropy is issues based, impacting investing is inherently outcomes based. Measurement tools are built in to track return and can drive desired behaviour within organisations.
Additionally, a successful investment can attract more capital from investors.
"The capital markets are broad and deep, and are multiples of the philanthropic giving market. If you can prove that giving money philanthropically works, that’s great.
"There’s a lot of money out there, you might attract some more. But if you can prove that investing to solve a problem works, the amount of additional capital you can attract to try and solve the problems that need a lot of capital is enormous," says King.
When asked if the added pressure on an investee of owing money to an investor can make the organisation use capital more efficiently, King says that while it could, most investors don’t want to be in the position of collecting money from a struggling charity.
To avoid becoming a creditor to a philanthropic organisation, investors can, instead, add a clause in the investment contract that if the investment goes bad, it automatically becomes a gift, King suggests.
"I, as an investor, do want the money back and I think it drives the right behaviours and it allows me to recycle the capital and have more impact over time, and that’s all great. But if it doesn’t work, the last thing I want is to be in the paper somewhere as having a lien on this homeless shelter.
"The mindset of the people doing this is, broadly, to do good. The last thing they want to do if and when something goes bad, is to exacerbates negative outcomes," explains King.
However, not all investors are willing to lose money if an impact investment fails. To assist in overcoming this fear during the industry’s developmental stage, some charitable organisations have volunteered to take the first loss position in risk structures.
"From their perspective, it is charity. It is what they do anyway. But if in doing this, they can attract other capital that otherwise wouldn’t be available – and as a combined capital, have much more effect – that certainly has been done," says King.
Potential
In a survey included in the WWR, 71.5% of respondents said they would like to receive a moderate or high level of support from wealth management firms in fulfilling their social impact goals. Only 56.8% said they were actually receiving this support.
This 14.6 percentage point gap reveals a strong opportunity for wealth managers to strengthen client relationships or attract new clients by improving their capabilities in the field.
According to King, most banks are already making an effort into expanding their services, though the amount of attention social investing receives varies widely.
While some banks only have a few people addressing the segment, Deutsche Bank, for instance, has its own Impact Investment fund, and Morgan Stanley has a dedicated Investing with Impact platform.
Most private banks, at the minimum, view impact investing as an emerging trend, and they don’t want to get left behind, be devoid of necessary capabilities, or have nothing appropriate to say.
King adds that there is an abundance of those he calls "future impact investors" who can be tapped – clients who care about social and environmental issues, but have yet to self-identify as impact investors. They either need to be asked, or find help in understanding their options.
According to King, while still in its growing-up stages, impact investing’s potential as a tool for wealth managers to improve their services, alongside helping solve "some of the world’s most profound social and environmental problems", cannot be ignored.
