With the projected transfer of wealth over the next decade from baby boomers to millennials – some estimates suggest the amount to be more than US$12 trillion – the asset management industry is gearing up for a substantial change. For it appears that millennials are much less likely than previous generations to prioritize financial return to the exclusion of all else. Other factors appeal, including what is loosely called ‘impact’.
An impact perspective can mean the imposition of both positive and negative conditions on the deployment of capital. For some, it is enough to screen out investments in businesses that nominally have a negative impact on society or the environment, such as those engaged in fossil fuel extraction or use. We see students on campuses forcing the endowments of their universities to shed investments in such stocks, even at the expense of investment returns.
For others, capital must be more actively deployed into companies that add value to society, rather than simply generating good returns. It is in this domain of impact investing where the asset management industry is racing to keep pace with millennial thinking.
The old models were designed to create portfolios that, at their core, sought the highest risk-adjusted returns, meaning financial return. By adding an impact perspective, the models need rethinking. After all, just because a wealthy inheritor is willing to look at a broader set of outcomes, it doesn’t mean he or she is willing to take on greater financial risk. So how can financial return be blended with non-financial outcome in the equation of investment success?
One important challenge to address is the perception that there must, by definition, be a financial trade-off if non-financial outcomes are to be prioritized. But need that be the case? We don’t think so. In fact, we believe that where consumers are increasingly turned on to brands that display a conscience, the most successful companies of the future will be those that take on positively impactful activities.
Perhaps even more fundamentally, it is our belief that any company that seeks to provide its goods and services at more affordable price points whilst matching or increasing quality benchmarks, will succeed in a competitive marketplace. And by increasing affordability, the company is providing its customer base with an opportunity to free up resources for savings or for the purchase of essential items.
At a macro level across a large enough customer base, particularly in social service sectors such as healthcare or education, this equates to providing a benefit to society at large. It means market leading companies can effectively subsidize educational opportunities for children across the economic spectrum or provide health benefits otherwise unavailable to uninsured patients. In doing so, public resources are saved. By definition, such benefits would not apply in sectors that are deemed to have a negative impact on society such as gambling, tobacco or sugar-sweetened beverages. A negative screen is still required for the purposes of devising investment strategy.
With that caveat, we believe that impact investment strategies can encompass profitable and market leading businesses across several sectors of the economy. Unfortunately, the way the impact investing community has shaped the narrative to date means that most impact funds have a much tighter definition of impact, where profit is a secondary consideration. Our view by contrast is that financial sustainability should be at the core of any strategy – philanthropic or for-profit. Impact investing should not be confined to gifting benefits in tightly defined arenas such as free vaccinations in Africa. Trade-offs are not an inevitable outcome of impact investing. With careful investment selection, “trade-ons” are very much achievable.