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Blog – Confluence Philanthropy: How Investment Advisors Can Help Their Clients Embrace Investing For Impact


A growing number of foundations, endowments, family offices, and other investors are looking for ways to align their investments with their values. For many of these allocators, achieving this goal will require embracing an approach to investment that goes beyond seeking financial returns to also considering the potential for these investments to have a positive impact on our society and the environment.

The adoption of impact investing has grown tremendously in recent years and is now estimated to be over $1 trillion in size worldwide. Alongside this growth has been a significant evolution in the types and volume of opportunities available across all asset classes.

To help navigate this complex landscape, investment advisors and outsourced chief investment officers (OCIOs), who we will collectively call OCIOs here, are uniquely positioned to guide investors in their exploration of how they can invest in alignment with their values thanks to their experience, expertise, and insights into how to match client goals to investment realities. There are multiple approaches that OCIOs can take to encourage more clients to embrace these opportunities.

Educating and Actively Engaging Clients on Values-Aligned Investing

Although many investors express an interest in values-aligned investing, there is often a gap in understanding the specifics, including how these investments work, the potential returns and risks involved, the breadth of implementation options, and the societal changes they can drive. OCIOs have a responsibility to educate their clients about these nuances to make sure there is no confusion about the opportunities available and the pros and cons of each option. Identifying and meeting clients where they are on their journey is important to understanding the levels of engagement that are required.

This education process should start with advising clients on an enterprise-level strategy that delivers on both the impact and financial objectives of individual clients. A common mistake is to only support clients with an initial commitment to impact or a one-off allocation. While this may seem tempting as a starting point, values-aligned investing should not be treated as just a momentary achievement but rather as an intentional evolution of how investment decisions are made. For OCIOs, this means working alongside the client to ensure the governance, strategy, and portfolio construction framework is aligned with maintaining a long-term commitment to values-aligned investing. Engaging with clients on the key principles of diversification, portfolio construction, and manager selection applied to each client’s specific strategic and financial objectives is critical.

Demonstrating the Financial Viability

One of the biggest hurdles for clients considering a commitment to impact is concerns over the potential for compromising on financial returns. OCIOs can play a crucial role in alleviating these concerns by presenting performance data and trends that demonstrate that values-aligned investing does not have to solely imply a compromise on returns.

While it is true that concessionary capital plays an irreplaceable role in addressing some pressing issues, there are several key gaps that are better suited for commercial capital. In fact, when evaluating investments for our mission-aligned clients at Capricorn Investment Group (Capricorn), we specifically link impact and risk-adjusted returns. That is, we pursue investments where impact and risk-adjusted returns are directly correlated; this means that as the scale of impact increases, so do the financial returns. These investments tend to be in areas of the global economy that are undercapitalized and less efficient but have sound financial characteristics, making them attractive investment opportunities for specialist managers. Likewise, investing in companies and funds that are at the forefront of adapting to global threats can help reduce systemic risk for the portfolio.

Identifying these kinds of win-win investments requires deep knowledge of the investment landscape, much like the deep understanding needed of any field to produce superior long-term risk-adjusted returns. By demonstrating the risk-return-liquidity potential, OCIOs can help shift the perception from values-aligned investing being concessionary to being a key component of a strategic investment portfolio.

Aligning Impact Goals with Financial Goals

Mission-aligned clients often have a specific mission or set of values they would like to pursue through their investments. OCIOs must work closely with clients to understand these values and prudently align them with their financial goals.

This involves forming a close partnership with clients to continuously refine how the client’s mission and values are integrated into investment strategy, starting with designing the investment policy all the way through selecting specific investments and monitoring portfolio performance. Given each client will have different objectives, it is important for OCIOs to create tailored solutions that fit the unique profile of each client.

Examples of ways to follow a strategic approach to making asset-class decisions to achieve impact alignment while preserving desired portfolio utility characteristics related to liquidity, risk, and return include:

    • Favoring strategies such as technology-enabled lending to low-income communities and climate-related instruments to access liquidity and low correlation to equity markets. A traditionally managed portfolio often prefers instead to meet this investment objective by allocating to hedge funds, which generally have limited potential for meaningful environmental or social impact.
    • Orienting real assets portfolios towards infrastructure projects, such as renewable energy generation, which exhibit limited commodity and equity risk while still providing liquidity through contracted cash flows. The added advantage of this low-risk approach to real assets is that it accommodates additional equity risk in other segments of the portfolio, such as those focused on private equity and venture capital, which are better positioned to deliver impact.

At Capricorn, we have found that these approaches have worked well to help our clients achieve their goals.

Continuous Monitoring and Reporting

To deepen client commitment to values-aligned investing, OCIOs should implement robust monitoring and reporting mechanisms. Clients want to see not only how their investments are performing financially, but also the impact they are making in the world around us. This can involve providing regular updates on both financial and impact performance using performance metrics. At Capricorn, we complement this with a supporting narrative that puts the data in the appropriate context. For all impact-aligned investments, Capricorn strives to have a clear theory of change and impact indicators, which help us track progress and course-correct as needed.

Systems Level Thinking

Thoughtfully designed impact-aligned portfolios are more than a collection of assets. Investments should individually stand up to the tests of financial performance and impact potential, but they would also complement each other in amplifying the collective potential of the portfolio. By maintaining a system-level perspective, we can better understand and enhance the interconnections within portfolios, and thereby create portfolios that are greater than the sum of their parts. As the benefits of aligning investments with impact outcomes become increasingly clear, we expect that the shift toward values-aligned investing will continue to gain momentum.

Source: https://confluencephilanthropy.org/How-Investment-Advisors-Can-Help-Their-Clients-Embrace-Investing-For-Impact