There has been a sharp rise lately in talk of impact investing, but what is it, and how should the wealth management industry think about this trend?

A lot of financial terms are hurled around these days and one that has become more visible is “impact investing”. According to a quick Google search, the term brings up 23.4 million search hits.

Impact investing can sometimes be conflated with philanthropy, but as discussed at the recent UBS Philanthropy Forum in St Moritz, Switzerland, the term needs to be accurately understood to avoid confusion. But once any misunderstandings are cleared up, impact investing can and should become a significant part of the investment toolkit. (To see more about the UBS forum and the bank’s ambitions in philanthropy and values-based investing, click here.) There is plenty of potential growth: out of a multi-trillion dollar asset management industry, impact investing is still relatively small. According to JP Morgan figures, in 2013 an estimated $9 billion will be allocated to impact investments globally – a niche investment area which represents a predicted market opportunity of up to $650 billion over the next decade.

In a panel discussion moderated by myself – this publication was exclusive media partner at the event – speakers who discussed the issues were Wiebe Boer, chief executive officer, Tony Elemelu Foundation, Nigeria; Andreas Ernst, head of impact investing, UBS Wealth Management and Jennifer Pryce, CEO and President, Calvert Foundation. The panel session was entitled Philanthropy & Investing – Broadening the opportunity for impact.

From my vantage point as a financial journalist, I noted that the volume of interest in impact investing, and the amount of material sent to us from firms has noticeably risen in recent years, a process not really altered by the 2008 financial crisis. Although some more traditional forms of investing have sometimes fared well (“unethical” stocks such as tobacco can sometimes be strong), the ability to do good while earning a solid return appeals to people in an age with more awareness than before about the plight of the less well off.

“Impact investing is a lense you can put across your portfolio,” UBS’s Ernst said, arguing that impact investing was different from philanthropy, which isn’t about investment as such but about a transfer of resources with no necessary expectation of a financial return.

Boer, meanwhile, said impact investing can only be about the intention of the investor – there must be a way to evaluate the results.

As for Pryce and her understanding of the term, she said agreed with Ernst’s idea of it as a way of seeing investment. “There are many technical definitions for impact investing that can create hours of conversation and debate, however, I sat next to a fellow attendee of the forum this morning and she said it well – `investments that make a difference’. You can have assets within fixed income, alternatives, cash that have been screened for their social as well as their financial return.”

Sustainable

“Impact investing can be a part of a general sustainable investment stratetgy,” said Ernst. He said UBS advises clients on such investments and also gives them access to third-party products. “We see an upside on the buy-side. It gives investors an opportunity to play certain mega-trends. There is an enormous social and commercial opportunity in designing and making such products and services,” he said.

Ernst talked about the emergence of a “sustainable consciousness” among investors and commentators. He said strains on public welfare systems in the West are also driving alternative options.

“We see an interest from clients and investors who see the need to make investments with values.” There are vocal philanthropy-minded investors and those who can see attractive returns, such as 12 to 15 per cent and from a low level, he added.

There are, however, some bottlenecks, he said. “Anything that is new means that investors at first will stand on the sidelines. Another issue is that the median-size impact investing fund is $5 to $25 million, which is small. Such investments are relatively expensive,” Ernst said, adding: “It requires some courage for investors to look beyond conventional investments.”

Calvert

Pryce spoke about the work of the Calvert Foundation to illustrate her particular angle on the issue. “The Foundation has a history of nearly 20 years and we have a long history within the impact investing sector as the number of funds and investments vehicles as well as interest has exploded in the past five years,” she said.

She talked about how her firm makes loan-based investments; her firm’s products are classified as a fixed income asset. To date, Calvert has sold over $1 billion in notes. At any one time, Calvert has about $500 million of assets under management.

“One challenge to grow of the sector is a practical one that impact investment funds, products, vehicles that have emerged over the past few years will need more time to develop a track record of performance to draw in more conventional investors,” Pryce said.  

Her firm has started a new investment portfolio, funded by women for women. The Women INvesting in Women INitiative (“WIN-WIN”) is a $20 million fund by and for women. “WIN-WIN will enable investors to invest in women as agents of their own economic power and opportunity, while receiving financial as well as social returns,” she said.

“We are not seeking to replace the important work being done with women’s philanthropic dollars but rather to augment it by accessing and employing women’s investment capital. Women comprise nearly half of the nation’s top wealth holders and control $20 trillion in investment dollars globally. Clearly, women's investment capital has a huge potential to transform the lives of women around the world - both the beneficiaries and the investors. The market currently lacks products that can help shift women’s capital toward investments that support women as leaders and agents of their own economic power and opportunity,” she said.

“We will use Calvert Foundation’s signature Community Investment Note product as a vehicle to channel women’s investment capital. Starting at just $20, our Community Investment Note is available to any investor in various terms and rates up to 2 per cent. Through the women’s initiative, women investors will have the opportunity to target their investments in the Note to a designated portfolio of organizations,” she added.  

Wiebe Boer:

Boer talked about the foundation and how Mr Elumelu was forced, due to a term-limit rule, to give up his CEO job at a bank, a fact that led him to think about some of the issues and hurdles facing businesses in Africa.

“Most of Africa’s economic history over the past 500 years has been about extraction,” he said, referring to sectors such as raw materials and agriculture, rather than services, manufacturing, and other areas.

“The foundation is trying to create a new type of capitalism in Africa,” he added.