Green investments, SRI, ESG, values-based investment, impact investing, social enterprise, philanthropy; the list goes on. Confused? So are many wealthy individuals and families wanting to make a difference with their capital and looking to their advisers for help.
Indeed, the range of options for philanthropy and investments that either avoid something, like tobacco, or actively seek to encourage something, like social enterprise, has expanded massively in recent years. Gone are the days when wealthy individuals and families simply donated money to their chosen causes. Today’s wealthy want to be able to not just donate to achieve a societal return but also invest for good, living their values through impact investing. They expect to see their money put to work appropriately with some measurables and reporting in place when it comes to impact. Indeed performance can be measured in many different ways, and value does not always have to be financial.
“People are starting to terminate their relationships with their advisers because they see that they just do not have the skills or the capacity to meet expectations.” John Pepin, Chief Executive, Philanthropy Impact
UBS concurs. Its recent report, ‘Top five trends in philanthropy in 2023’, says: “We are seeing philanthropists put their values, investments, and businesses to work for impact, pursuing opportunities to make their giving go further. Traditional investors are becoming more interested in investing in commercially-viable social enterprises. But there is a recognition that more support is needed to help emerging social enterprises become investable. Philanthropists are jumping in to fill this gap by using their philanthropic giving to de-risk financing and catalyse other forms of private investment capital.”
John Pepin, Chief Executive at Philanthropy Impact, comments: “It is really important to recognise that we are operating at the intersection between philanthropy, social investment, ESG and impact investing. Professional advisers need to be able to cover the whole spectrum of capital to meet the changing needs of their clients and they need to be informed of the 23 services we have identified in our recent research that are needed by philanthropists and impact investors creating the structures and other links for customers to be able to invest and allocate capital across the spectrum of options.”
Indeed, demand for options is at an all-time high - particularly given wealthy Gen Z and Millennials who are more interested in investing for good than their predecessors and want to be more involved with their money – often making investment decisions at least partly based on values. Covid-19 also upped levels of social responsibility and brought about a more caring society, and issues that concern us all, such as the environment and broader ethics are causes increasingly close to the hearts of those able to invest or donate to make a difference.
Demand to diversify
In the US, for example, rich donors gave an average of US$34,917 to charity in 2022, a 19% increase from pre-pandemic levels, and 85% of high-net-worth households gave to charity in 2022, according to Philanthrophy 50. Meanwhile, 72% of the world’s population supported others through giving, according to the Charities Aid Foundation 2023 World Giving Index.
Giving levels clearly show no sign of dropping, but what is interesting is that levels of values-based investing, social enterprises and other ‘for good’ endeavours are on the rise too - pointing to a ‘money for good’ sector that is, overall, growing.
Indeed, the 2021 Sustainable Signals study by Morgan Stanley found that interest in sustainable investing by Millennials hit a record high at 99%. In addition, 80% of investors were interested in sustainable investing, with 50% of all investors and 75% of Millennials also interested in investments related to social justice.
And the Global Impact Investing Network’s 2022 “Sizing the Impact Investing Market" report estimated the size of the total worldwide impact investing market at just under US$1.2 trillion.
Pepin comments: “The world is changing, and within the needs and expectations of wealth holders are too. People want to align their wealth with their values. And they expect their professional advisors to provide support to achieve this.”
He says that advisers need, firstly, to frame and contextualise a conversation about values, motivations, and ambitions with the customer. The second part of the conversation is to then create an action plan to create symbiosis between values and investments.
Customer expectation
“The ability to have that conversation, set a framework and articulate a strategy is so important. But it is also one area where the adviser community is felt to be failing its customers.” he says.
This is important in an era where expectations are high and loyalty levels, particularly from those who have created their own wealth or have newly inherited wealth, are low.
“In some cases, people are starting to terminate their relationships with their advisers because they see that they are not meeting their expectations - it becomes an irretractable issue. In many firms, there is a lack of clear strategy and services and knowledge and credibility around some of these issues,” says Pepin.
Framework
The recent research by Philanthropy Impact acknowledged the change in attitude and expectation and developed a framework for action. This is highly relevant for advisers in itself but also in that is strongly relates to Consumer Duty and customer centricity. Wealth managers now have to be demonstrably customer centric and show how best outcomes were achieved for the customer. To do that properly advisers have to be able to talk to people about their values, motivations, ambitions and personal goals, and then project that forward into action via investment or giving.
“To propel things, the adviser needs to have an ecosystem in place and partner with the right people. Having the whole gambit of expertise in house is an impossible ask, so firms will have to learn to work with other firms to best meet customer need,” says Pepin.
He explains that to that end, Philanthropy Impact has established a new service called 23 Impact, which is a directory of resources across the spectrum of capital to assist with this.
He says that the adviser must now look upon this as an entire journey, much like the demand to accompany the client through their whole lifecycle concerning other investments is now commonplace. Clients want a trusted adviser to walk the walk with. However, he says this relies on the adviser knowing that the purpose of the ‘investment’ is not necessarily financial returns and having a good understanding of the other returns that the customer seeks. The UBS report says of returns: “Financial tools like impact loans, outcomes contracts (or impact bonds) and blended finance are blurring the borders between investment and philanthropy. We will continue to see an expansion of this openness to a broader spectrum of capital and a wider range of financial tools that can be used for different contexts and problems.” Pepin concludes: “In some cases, firms still do not have these discussions. Many firms often depend upon informal internal discussions, however, we provide specialised training and support as well as the ecosystem to put into place a set of guidelines and an action plan.
He points out that the other thing to keep in mind is that by doing this, the advisers could miss a commercial opportunity. Indeed, the research suggests that firms supporting their clients on their philanthropic journey and encouraging them in their ESG/impact investment have six times the median assets of those who do not offer charitable planning, three times organic growth, 1.3 times new inflows, higher net promoter scores, and higher trust levels. “In a world where loyalty levels are low and the quest to keep clients and attract new ones, then it makes sense to meet and exceed all expectations, not just investment ones,” he says.
Interested in reading the full report? You can read this edition of the WealthTech 2024 Annual Report online here.
