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Aon Retirement and Investment Blog

Investing With a Purpose: Evolving approaches and current trends

“Investing with purpose” is a concept raised frequently in high-level portfolio conversations. What was once discussed as an ideal hypothetical has evolved and continues to mature into an investment field with broadening choices and innovative uses. A diverse set of institutions and individuals “invest with a purpose,” and for this reason, a general review of the field’s current state and potential directions is useful to institutional investors.

The concept of investing with a purpose is not new. As early as the 1920s, mutual funds with negative screens on tobacco, alcohol, and gambling appeared, indicating a product demand by investors that exceeded a focus solely on return. This trend has continued, and as of 2012, 11 percent of a total $33 trillion of assets under management, represented SRI assets. While “Investing with a purpose” has long been synonymous with “socially responsible investing” (SRI) different approaches have evolved to achieve social impact with financial return. The different terms for these methods include:

  • Mission related investing (MRI):  Similar to socially responsible funds, MRI funds align with the social values of a client. However, their approach is less predicated on the use of screens (which is a practice associated with SRI funds).
  • Program related investing (PRI):  Program-related investments are commonly associated with private, non-operating foundations and represent capital deployed, particularly in the form of loans, to accomplish its charitable goals.
  • Impact investing: This is defined as “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return”. Approaches to achieving this are typically more sector or geography specific. Economically Targeted Investment falls into this category.
  • Environmental, social, and governance (ESG) investing: This describes the integration of factors into an investment process with the goal of identifying issues that can affect the sustainability of investments.

Not only have terms associated with “investing with a purpose” expanded, but the landscape has changed substantially as well.  The field is now characterized by greater participation across a diverse set of investors and greater collaboration between investors and providers as it relates to the development and implementation of products and thought leadership around the space. For example, while debt instruments are still the choice vehicles for investing in regions outside of North America, interest from investors has led to an expansion in options across asset classes, including venture capital, private equity, and long only equity vehicles. High net worth individuals and family offices continue to lead other types of investors in the implementation of “purpose-driven” products, but financial institutions and pension plans are increasing their attention to this investment approach as it gains both social currency and media attention.

There continue to be hurdles that deter institutional investors from fully participating in the growth and advancement of purpose-driven investments. As the field of impact investing has developed, the evolution and distribution of products that encompass different sectors, regions, and ultimately, deeper levels of alignment with various missions, have markedly increased. However, what challenges the endorsement of these products by institutional investors is the inability of such offerings to meet various “check the box” standards. These include length of track record, minimum asset levels, fees, liquidity, and risk/reward ratios. The advancement of these standards is challenged purely by where the field is in its life cycle. Given that the field is still considered in the “early stages”, few products have track records exceeding three years and remain relatively expensive to traditional products. There is also the risk that a client’s initial investment may exceed the investment opportunity, especially if a product is new or not associated with a larger financial institution. Additionally, there are fewer liquid equity-like options than debt, private equity, and venture capital-like investments. Another challenge to consider is implementation of purpose-driven investments, particularly for plans (like ERISA) that are guided by stringent expectations around investment performance. In these cases, financial performance as measured against traditional non-SRI benchmarks is paramount, and payment for the costs of plan administration and the provision of participant retirement benefits are exclusive, non-negotiable investment objectives. Given the relatively short track records of many purpose-driven investments, it may be difficult to gauge the probability of a strategy’s success over a full market cycle. This challenges one’s confidence in recommending purpose-driven strategies in the face of requirements around financial performance. Despite these various challenges, it is expected that, with time, these factors will be less of a concern. For now, they come in conflict with fiduciary considerations, particularly as they pertain to risk management, which remains paramount with institutions.

Other hurdles involve education and assessment, leading to brand confusion by potential participants in the space. First, for some institutional investors, impact investing is solely synonymous with traditional SRI (i.e. negative screening focused) mandates. As such, traditional SRI products are recommended in lieu of strategies that have an approach that could more specifically align with a client’s mission. Second, it can be difficult to measure the social impact of a purpose-driven investment. This has to do with how social metrics have been shaped. IRIS is a catalog of performance measurements generally accepted by impact investing initiated by the Global Impact Investing Network. Much of the data for standardized IRIS metrics has been voluntarily supplied, and as such, the currently tracked universe may not be reflective of its true scope.  More data and anecdotal observations are needed, and it is assumed, will be gathered over time, to build a robust universe of investments and to provide insight into the dynamics between social considerations and financial performance. This will provide a stronger perspective from which to consider purpose-driven investments in institutional portfolios, and it will help drive the development of more specific benchmarks.

Growth and innovation in the field of impact investing justifies continued interest and participation. While challenges to the field merit caution, or perhaps even temporary avoidance of the space by some, the ultimate decision to invest in the field is one that must be evaluated in the context of many factors specific to a client’s mission and fiduciary parameters. Even if this investment approach does not appeal to some investors now, it may in the near future. Small and gradual allocations by investors today will provide these same investors with valuable insight into the risk and reward of such investments. Furthermore, it will provoke thoughts on innovation and best practices as they relate to the use of these funds in complex lineups. The long runway for growth provides investors currently in these strategies the opportunity to participate in the advancement of existing products and initiatives and to contribute to their evolution.

 

Nicole Wubbena is a Senior Consultant in Hewitt EnnisKnupp’s Global Investment Management division.


The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs.Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case, nor should it be treated as investment advice. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.


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