InvestmentNews ESG & Impact Forum Reflections

Two of my favorite questions on how we can get more money into impact

Just [last week] I had the privilege of being a panelist at the ESG & Impact Forum at the United Nations where I got to be part of a discussion on how financial advisors can put ESG and impact investing into action. As the CEO of an impact investing advisory firm this is a topic that I speak to every day, so for me what’s exciting about an opportunity like this is the questions I get from the attendees. And [last week] I got two questions that really go to the core of why I do what I do and highlight how — with just a little bit of shapeshifting — traditional financial advisors can reinvigorate their relationships with their clients and help drive more capital to the issues that matter to their clients.

My first question came from a traditional wealth manager and went something like this:

Question 1: My clients don’t ask me about impact investing and most probably don’t know anything about the UN Sustainable Development Goals. So why should I bring up the impact conversation, and if I do, how would I go about doing it?

This is a great question I often get and it’s profound because I believe advisors are the gatekeepers that are currently holding back the capital from flowing in this direction and therefore are the ones we need to help drive the impact movement forward.

I’ve seen poverty and social issues first-hand across six continents. I know for sure that the only way we’re going to address them is if we use all types of capital as a force for good. Philanthropic dollars and great public policy work are not going to get us there alone – we need to use multiple levers.

At Align, we partner with our clients to meet them where they’re at — to dive into why they want to do impact investing before we even consider the how and the what. We first uncover their Why so they are actually moved to look at the possibilities in a way that actually inspires an aha! moment and changes their behavior. We do this by partnering with their advisors, the gatekeepers of the capital. Advisors are the trusted partners of their clients for a reason. Clients want their advisors to recommend these types of investments. They want us to challenge them, and they want us to have these conversations. And then we can get to the how and what.

How do you do it? Don’t overcomplicate it. Part of the art is the question you ask your client. There’s only 12 inches from your head to your heart, and you as the advisor can help them bridge that small gap. The science – the investing acumen — is in our heads, but the art is in the Why, the SDGs, the very personalized client conversation. If you want to take your client relationship to the next level, this kind of a dialogue will rekindle the partnership. Ask your clients what they care about. They’ll come alive.

Question 2: If you have a client with a philanthropic mission, does impact investing mean that you’re going to be looking at concessionary returns? Is it real investing?

This is also a question I get a lot and I was glad an advisor raised it, because we need to be really clear when we throw around terms like concessionary. One of the biggest misnomers about impact investing is that it somehow involves concessionary returns. That’s incorrect. Our work at Align spans all asset classes, industries, and geographies so we can align a client’s capital with their values in a way that meets their financial and philanthropic objectives. This means designing a portfolio of investments with a range of risk / return profiles from philanthropy and traditional grant-making on one end to market rate returns on the other end and everything in between.

There are plenty of traditional investments that give concessionary returns for the level of risk that you’re taking. When we look at the spectrum of capital we are looking to see what the best use of each kind of capital is across the spectrum and we need to make sure the capital is aligned with the objective.

For example, when we’re investing in an early stage company in east Africa that doesn’t yet have a pilot that’s been proven, that doesn’t have revenue, that operates in a tricky jurisdiction – it would be an inappropriate use of capital to put this kind of investment into a trust or consumption bucket for current use or future generations. Usually families or individuals have some type of philanthropic bucket and this is where you want to take this kind of risk.

In this case, an investment with a lower return is a win-win for everyone. It’s a win for the investor / donor because they are de-risking their investment. They may be getting a concessionary return but it’s better than a negative 100% expenditure from a philanthropic perspective. Secondly it gives the entrepreneur or the fund the flexibility and time to develop their business without the return pressure that is inherent in venture or private equity capital (which would arguably be an inappropriate allocation of capital in this case).

We need to use philanthropic capital in more innovative ways to maximize its effectiveness. Mostly, we’re using traditional grants or possibly recoverable grants. We have many more tools in our toolbox to leverage.

We need to use all of the tools that we have, like program related investments, where we have impact first and financial objectives second; first loss guarantees where you might be willing to take the risk as a foundation or DAF, so that a market rate investor will agree to come along side to invest and help catalyze a business or marketplace; or guarantees that use a client’s balance sheet to unlock more capital while my capital is still being invested in another allocation.

Our society’s problems are enormous and philanthropic dollars can’t do the job alone. We give somewhere between $398-410 billion into philanthropic capital every year to solve an enormous amount of social and environmental issues. For example, about 785 million people do not have access to clean water and 2.5 billion people do not have access to sanitation. In reality we need to be putting in investment capital in addition to philanthropic capital. These are infrastructure issues which require investment capital.

Most investors have these different buckets of capital and different objectives, so when someone raises the issue of concessionary returns, let’s be really clear about what kind of capital they’re talking about using and what their objectives are and ensure to maximize effectiveness.