Do you consider impact when choosing where to invest your money? Recently, we discussed shifting investment to the risk–return–impact model and how pension funds are one of the two big players in the room. Today, I would like to cover the second big player: asset managers.
Impact Investing in the Mainstream
Investing for impact is becoming increasingly mainstream among big-name asset management firms. UBS, currently the world's largest private wealth manager with $2.7 trillion in assets, has stated that sustainability is a cornerstone of its business and has set a goal of raising $5 billion in impact investing to advance the SDGs. Already, UBS has raised $325 million for The Rise Fund, the TPG-managed impact investment fund co-founded by Bono, the lead singer of U2 who has become a powerful advocate for impact investment to achieve social progress.
UBS has been a champion of the SDGs and strongly believes that private capital is critical in meeting these goals. As of 2018, UBS's ESG assets had tripled from $63 billion to over $200 billion, which they attributed in large part to their focus on achieving these goals. "ESG is becoming integral to driving our client engagements," says Michael Baldinger, the company's head of sustainable and impact investing. UBS also helped create Align17, a digital marketplace for impact investment opportunities, as a tool to encourage other private investors to take the plunge into impact investing,
Goldman Sachs is another big-name asset management firm that is involved in impact investing. It was a lead investor in the first SIB (Social Impact Bond) in the US, which aimed to reduce recidivism among released inmates of Rikers Island, New York City's main jail complex. In 2016, Goldman Sachs acquired the impact investment advisory firm Imprint Capital. At that time, they had about $500 million in ESG assets; by 2017, the number skyrocketed to $10.6 billion. According to John Goldstein, the co-founder of Imprint Capital, big investors increasingly look to put more of their assets into socially responsible investing. Instead of saying, "Why can't we do this with a small portion of our assets?" they asked, "Why can't we do this with our whole portfolio?" Goldstein said.
In a similar move, Schroders, the UK-based asset manager, recently purchased Blue Orchard Finance, a microfinance specialist.
As you can see, many big-name private equity firms are prioritizing impact and are launching specialized impact funds. TPG, Bain Capital, KKR and Partners Group have raised approximately $4 billion so far. These firms all seem to understand the sentiment announced by Megan Starr, the global head of impact for The Carlyle Group, who said it is no longer possible to generate high rates of return unless you are investing for impact.
Millennials and Big-Name Firms Making an Impact
The shift to impact reflects the current economic reality. Impact funds are being supported by big institutional investors, as well as high-net-worth individuals and their family offices. According to the 2017 Global Family Office Report, 40 percent of family offices were planning to increase their allocation to impact investing in the next year. Sara Ferrari, head of the global family office group at UBS, has said that this shift reflects millennials' increasing influence over their families’ affairs. With the world's billionaires set to hand down $3.4 trillion, 40 percent of total billionaire wealth, to their heirs over the next 20 years, this trend will only continue to gather momentum.
Big-name firms are taking action to make ESG and sustainable investing accessible to ordinary investors too. Bank of America, Merrill Lynch and Morgan Stanley are all offering ESG funds with various impact themes to their smaller clients. As an example, Morgan Stanley has launched an “Investing with Impact” platform, offering over 120 investment products aligned with a variety of values-based themes, such as Catholic values, gender equality, and climate-change-aware investing. The company has also developed an online education course for financial advisors, which is designed to teach them more about ESG investing. Educating financial advisors will ultimately help democratize impact investing, since millions of Americans rely on them to manage their money.
BlackRock, the largest asset management firm, which has nearly $7 trillion under management, is confident that impact investing is the future. "Sustainable investing will be a core component for how everyone invests in the future," CEO Larry Fink has said. Fink believes that sustainable investing, another name for ESG, does not mean sacrificing returns. "We are going to see evidence over the long term that sustainable investing is going to be at least equivalent to core investments. I believe personally it will be higher," he said.
Specialist Firms Prioritize Impact
A growing number of new specialist impact investing firms are helping demonstrate how impact investment can deliver market rates of return. Since their emergence in the early 2000s, these firms have helped pave the way for today's large-scale asset managers, giving credibility to the field. Some of their leaders came from the world of investment, while others came from the world of social entrepreneurship. Together they exemplify different investment approaches in how to deliver both impact and financial returns.
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This group's notable leader is Generation Investment Management, a sustainable investment management firm founded by Al Gore and David Blood in 2004, which manages about $20 billion. It promotes a vision of Sustainable Capitalism – a financial and economic system within which businesses and investors seek to maximize long-term value creation, accounting for all material ESG metrics.
Another specialist global impact investor, Triodos Investment Management ($3.9 billion), is a subsidiary of the Dutch environmental Triodos Bank founded in 1980. Their strategy includes supporting green and renewable energy, promoting inclusive finance by providing credit to micro-entrepreneurs and backing green and sustainable farming practices.
Bridges Fund Management, which I co-founded, is another early leader in the impact investment arena. Since 2002, it has used impact investment as a tool to address big societal challenges, raising more than $1.33 billion to invest in small and medium-sized enterprises, real estate and social sector organizations in the UK, USA, and Israel. In turn, these investments have created jobs in underserved areas, improved health and education outcomes and have led to to reduced carbon emissions – all while providing a strong commercial performance.
The Future and Beyond
These specialist impact firms are the frontrunners of the movement. They demonstrate the logic, power and success of impact investing and spur more established firms to move beyond the outdated risk–return model and adopt the model of risk–return–impact instead. If impact investing is a topic of interest for you, you can learn more by reading my book, IMPACT: Reshaping Capitalism to Drive Real Change. Additionally, in my next blog, I will touch on a few other book recommendations that I believe are vital resources for driving the Impact Revolution and social change.