For many of today’s wealthy families, it’s no longer good enough to have an investment portfolio that’s solely focused on striving to achieve sustainable long-term returns.
With prodding from the Millennials in their families, high-net-worth investors are increasingly looking to address large-scale societal issues – like climate change, education and clean water – through their investments. This space is far from niche, with investors adding over $1.2 billion in assets to socially responsible funds over the first eight months of 2016, according to Morningstar data.1
In fact, last week Ignites reported that assets in these products totaled $170.1 billion YTD as of 8/30/16, which is a 56% surge from the same period four years earlier.2 As a result, the entire industry is innovating rapidly to meet growing demand for values-based investments.
Earlier this year, Morningstar began scoring mutual funds based on based on their environmental, social and corporate governance (ESG) practices, and repeatedly, the world’s largest asset managers are rolling out socially-conscious product lines. It’s clear this is no passing fad. There’s a lot of money in motion seeking out these vehicles, and advisors who choose to ignore the trend do so at their own peril.
Unfortunately, I’m finding that many advisors are still flatfooted when it comes to impact and socially responsible investing (SRI), a reality that may prevent them from effectively cultivating the next generation of wealthy clients.
Why demand for impact investing and SRI is rising
Values-based investing is generating plenty of headlines these days, but it’s not a new concept.
According to the SRI Conference, Methodist and Quaker immigrants likely brought this idea to the New World hundreds of years ago. What we now refer to as ESG investing is something Methodists have been doing for over 200 years; and the Quakers never condoned investing in industries that benefitted from slavery or war, the SRI Conference notes.3
But today, the concept of values-based investing is rapidly gaining steam for a number of reasons. For starters, we have more access to information today than at any point in human history. People are more informed about what’s happening around the world in a way that prior generations weren’t, and are looking to make a difference with the causes they care about.
Through OppenheimerFunds’ research with Campden Wealth, we’ve learned that high-net-worth Millennials are actively looking to make a positive impact on the world through their careers and wealth. Impact investing is their vehicle of choice. Women investors are playing a key role in this phenomenon as well. Women already own over half of all personal wealth in the United States4, and a 2015 survey by TIAA notes that 70% of female investors were interested in socially-responsible investments, compared to just 55% of men.5
Add this all up and it’s clear than any advisor who is looking to maintain a vibrant practice will need to learn more about impact investing, ESG and SRI. Demand for information about these vehicles has never been higher, and if high-net-worth investors can’t get it from their advisors, they’ll get it from another source.
What a values-based portfolio looks like
Although demand for values-based investments is surging, there are certain elements of an investment portfolio that will always need to remain the same. Investors still need portfolios that have balanced risks, returns and proper exposure to the various parts of the capital markets.
But under values-based guidelines, for example, it’s not enough for an investor to own a large slice of large-cap U.S. equities. They will need a mix of companies that provide the right diversification benefits, while also utilizing ESG factors that allow them to express their values through the investment.
This does add a layer of complexity to portfolio construction and risk analysis for advisors, but fortunately, nearly every big asset manager is focused on building out a robust suite of ESG-type solutions, since so many investors are asking for them.
The most astute advisors are ahead of the curve when it comes to adapting their practices to the needs of their client base. But many advisors in our industry have not adjusted their approach, and they risk getting left behind if they don’t incorporate values-based investing into their practice now.
This is the latest installment in our monthly series about issues facing high-net-worth families and their advisors. To learn more about what HNW Millennials want from their advisor, read an executive summary of the Proving Worth study, or gain access to the full report.
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1 Source: Ignites, 10/27/16↩
2 Source: Ignites, 10/27/16↩
4 Source: BMO Financial Group, April 2, 2015.↩
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These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.