The Envestnet Edge, April 2016

Investing with impact: increasingly a matter-of-fact

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With the growing interest in impact investing, advisors need viable, accessible solutions that allow them to easily pivot client portfolios toward the priorities of key investor groups such as millennials and women.

This month’s Edge is a bit of a departure. Rather than focusing solely on big picture trends, we will discuss some specific products and approaches that are part of a larger trend that we believe will be a key to the future: impact investing. And for our clients to continue to be what we call “the essential advisor,” having a suite of tools and options to satisfy that need will be imperative. Hence our shifting gears this month to talk specifically about what we are working on and what we intend to offer as solutions.

Over the past decade, a steady drumbeat in the financial world seemed to signal that the era of impact investing has arrived. Like reports of the death of Mark Twain however, those prognostications have been greatly exaggerated, for the average investor most of all.

Yes, global pension plans were investing an ever-larger portion of their many trillions of dollars according to “impact” criteria, ranging from environmental to social to corporate governance. For decades, private institutions have screened out investments in companies whose businesses they find morally objectionable, such as gambling, tobacco, alcohol, and pornography. But impact investing for retail or individual investors has lagged those trends, and financial advisers have been reluctant to construct portfolios that incorporate impact criteria out of concern that doing so might negatively affect performance.

Now, however, we think we are nearing an inflection point at last. One reason is that after years of pensions and endowments and private institutions tilting their investments towards impact, it is increasingly clear that there need not be a trade-off between performance and impact, or between “doing well” and “doing good”. Although it is too soon to know if impact leads to long-term outperformance, it is fairly clear that it does not, per se, raise the risk of underperformance. And, as advisors and their clients embrace “personal benchmarks” that take a more holistic view of client needs, rather than a narrow one of beating an arbitrary bogey, impact investing is rising to the fore as a primary tool for achieving those goals.

To wit, 84% of millennials and 76% of women, according to a recent Morgan Stanley survey,1 state that investing with an eye to impact—environmental, social, and corporate governance, especially—is a central goal for them. Other firms surveying their clients, ranging from BlackRock to J.P. Morgan, have come to similar conclusions. Accordingly, they are dedicating more research and resources to reconfiguring asset management with products and approaches that embed impact principles in portfolios that use both qualitative and quantitative methods.

Our approach

It’s one thing to identify a need. It’s another thing to satisfy it. A proliferation of impact funds has emerged in recent years, though they still number in the low hundreds, making them a small portion of the overall universe of thousands of actively managed mutual funds and ETFs. Even so, that’s a sufficiently large number of options to make an easy choice complicated, given the amount of due diligence required to suss out the best ones.

For years, Envestnet PMC has screened managers, and in partnership with Veris, has also performed due diligence on impact managers. Now, however, working with the groundbreaking firm Sustainalytics, we are significantly expanding both our menu of options and the scope of our research. We not only are augmenting our list of impact managers, but also are working to apply various impact screens so advisers and investors can create quantitative portfolios tilted toward impact that closely track the performance of major underlying indices.

We are doing this based on the simple conviction that these tools are vital for investors. In fact, they represent our own commitment to impact principles and to fiduciary standards of acting in the best interests of clients.

But these tools are also part of a larger wave. The entire industry appears to be tracking the demographic and cultural shift of more women, more millennials, and more concerned people in general who articulate a desire for their investments to be a positive force in the world, and not simply a positive force for their own or their families’ lives. For sure, millennials control only marginal assets at present, and it may be that as they age and acquire more wealth, their stated commitment to impact might waver in the face of other concerns. But if the options exist to tilt any and all investment toward impact with similar performance profiles, it seems likely that today’s stated intent will become tomorrow’s actual behavior.

You can see the growing demand in every corner of the financial services world: more organizations such as Sustainalytics are doing intensive research on global companies, and scoring thousands of them on how well they meet (or fall short) of acceptable standards on everything from environmental impact to employee compensation to carbon intensity. You can see it in the United Nations Global Compact and reporting principles, and in how most of the world’s major corporations are making these concerns central at the board and C-suite levels. And you can see it in public attitudes in Europe and the United States, where a substantial portion of the world’s investible assets reside.

Being able to integrate these factors both quantitatively and qualitatively into portfolios is and will be ever more vital. Having flexible tools ranging from active to passive, from funds that explicitly integrate impact criteria to a basket of stocks that tilt in that direction, will be essential to the advisor, to the client, and by extension to the world as it evolves. Welcome to Impact Investing 2.0.

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1 Morgan Stanley, “Sustainable Signals: The Individual Investor Perspective”, February 2015.

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results. Indices are unmanaged and their returns assume reinvestment of dividends and do not reflect any fees or expenses. It is not possible to invest directly in an index.

Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet | PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

Neither Envestnet, Envestnet | PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.

© 2016 Envestnet, Inc. All rights reserved.


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