The Power of Impact: Untapped Potential for Asset Owners, Asset Managers and Wealth Managers

Why Impact Is an Important Investment Input for Asset Managers, Asset Owners and Wealth Managers

In today's investment landscape, the concept of impact has gained significant traction with the introduction of global frameworks like the United Nations’ Sustainable Development Goals and influential regulations like the European Union’s Sustainable Finance Disclosure Regulation. Whether or not they consider themselves impact investors, asset owners, asset managers, and wealth managers are increasingly recognizing the importance of integrating impact considerations into their investment strategies. However, investors are motivated by a range of reasons. For example:

• Asset owners may use impact as an investing input to align their investments with their environmental or social values and long-term objectives, to get a holistic view of the financial and sustainability performance of their investments, and to report to stakeholders.
• Asset managers may be motivated to reach new markets or respond to evolving client preferences with unique impact-themed products, and to build trust and credibility through transparent reporting.
• Wealth managers want to improve client relationships and satisfaction – and impact can support them by catering to clients’ values and objectives in their portfolios.

In this blog post, we explore the power of impact as a dimension in investment decision-making and how it can unlock new opportunities and deliver sustainable value for institutional investors.

Impact-Focused Investing: A New Tool to Unlock the Benefits of Impact

Investors have a range of intentions regarding impact that can inform their approach. At one end of the spectrum are investors that recognize the increasing emphasis on impact and want to use it as one factor among many to enrich their investment decision making or reach a double materiality standard. We describe this approach as “impact-focused investing.” At the other end are investors who want to make specific real-world changes a key objective of their investment process. They will prioritize these impacts above other factors and design an investment strategy that actively enables their defined impact objectives. Most market participants traditionally refer to this approach as “impact investing.”

Impact-focused investors are not looking to link their investment capital to specific impact outcomes that can be attributed to the investment itself. Rather, depending on the investment approach, they look to:

• Incorporate a company’s impact performance in investment decisions.
• Engage companies or avoid companies with negative externalities.
• Seek companies that are taking steps toward or already contributing to positive social and environmental outcomes.

This approach can be integrated into existing investing strategies and enables a broader range of investors to align their financial goals with positive social and environmental objectives.

Impact-focused investing has emerged as a powerful tool, reflecting the growing recognition of why impact is important. By deliberately targeting investments that support defined impact objectives, investors can align their investments with causes they care about while achieving financial returns. Impact-focused investing offers a range of thematic opportunities, such as renewable energy, diversity, equality and inclusion, affordable housing, and sustainable agriculture, allowing investors to contribute to a more sustainable future.

Asset Managers: Differentiating Products and Reporting to Clients and Stakeholders

For asset managers, embracing impact-focused investing provides a unique opportunity to differentiate products and services in a crowded market. By offering impact-focused investment options, asset managers can attract investors seeking to align their investments with their ethical values.

In practice, this means fund managers can use impact data to:

• Identify investment opportunities with positive impact.
• Reduce or eliminate portfolio exposure to negative impact companies.
• Engage with portfolio companies to improve their impact.

Asset managers also have an obligation to measure and report on the impact performance of investments for clients and other stakeholders. This includes, but is not limited to, compiling relevant impact data, analyzing the impact of portfolio companies, measuring and showcasing outcomes of their sustainable investing missions, and differentiating between intentional impact and incidental or operational impact.

Transparent reporting on impact metrics and outcomes is vital for building trust and meeting the increasing demand for accountability from clients and stakeholders. By demonstrating the measurable impact of their investment offerings, asset managers can strengthen client relationships and position themselves as leaders in sustainable investing.

Asset Owners: Selecting and Monitoring Investment Mandates and Reporting to End-Investors

Impact-focused asset owners need to understand impact to align their investment strategies with their values and commitments, to set mandates for external managers and track the performance of these mandates against objectives, and to report to end-investors. By integrating impact considerations into the selection and monitoring of investment mandates, asset owners can align their investment portfolios with their values and long-term objectives and commitments.

Whether or not they consider impact a strategic focus, many asset owners will also need to report directly to end-investors on impact performance (e.g., pension plan members). Transparent reporting on the impact of investments helps asset owners highlight their alignment with the impact preferences of their participants or end-investors, fulfill their fiduciary responsibilities, promote engagement, and build trust with stakeholders.

Wealth Managers: Enhancing Responsiveness to Clients’ Preferences and Objectives

Wealth management firms are at the forefront of understanding and catering to clients' evolving preferences and objectives. While wealth managers are focused on serving end-investors, they face many of the same pressures as asset managers, including calls for transparency and reporting, providing investments and advice that match clients’ values, as well as meeting regulatory compliance and market expectations.

Incorporating impact considerations into wealth management strategies enables wealth managers to better respond to clients' desire for investments that align with their social and environmental values. By offering customized impact portfolios, wealth managers can forge stronger relationships and help clients achieve their financial and impact objectives.

The main unique factor pushing wealth managers to incorporate impact into their practice is to support advisors who are providing information to clients and responding to clients’ investment preferences. This client-centred approach not only enhances client satisfaction but also positions wealth managers as trusted advisors who actively contribute to creating positive change.

Considering Impact in Investment Decisions Can Benefit All Investors

The power of impact and impact-focused investing cannot be underestimated, and even for those who don’t consider themselves impact-first investors, it is important to understand why impact is a key dimension in investment decisions. For asset owners, asset managers, and wealth managers, integrating impact considerations presents an opportunity to unlock new avenues of value creation. It enables differentiation in the market, strengthens client relationships, enhances investment insight and reporting, adds depth to stewardship efforts, and aligns investments with social and environmental goals. By harnessing the potential of impact as an input into investment decisions, investors can not only generate attractive financial returns, but also select investee companies that contribute to a more sustainable future.

To learn more about impact and how impact-focused investing can support asset managers, asset owners and wealth managers meet their diverse goals, download our ebook, Why Impact Matters: Seven Essential Considerations for Investors.