When money has an impact

Ron Cordes and his wife created a family foundation with proceeds from the 2006 sale of AssetMark Investment Services to Genworth Financial, but he quickly tired of discussing how to dole out small grants to charities. He wanted 100% of the foundation's dollars put to work improving the world. That's how Mr. Cordes found himself among the early participants in impact investing, an approach that targets companies or projects that can effect positive change in a community or further a cause, while at the same time delivering a financial return. Mr. Cordes soon invested about 20% of the foundation's portfolio in small businesses and microfinance loans in 25 countries around the world. A couple of years later, when equity markets were taking a beating at the end of 2008, he discovered that his impact investments were the best performers in the portfolio.

OUTPERFORMANCE

“How ironic that these investments in countries that I couldn't even point out on a map had outperformed traditional assets,” said Mr. Cordes, who is executive co-chairman at AssetMark. He also has become a leader in pushing the financial industry to develop more impact investment products and co-founded ImpactAssets, which offers a donor-advised fund and publishes an annual list of 50 investment managers who specialize in the activity. Mr. Cordes has seen investor demand spur independent financial advisers to seek out such investments for clients. He also has witnessed a shift at the wirehouses, each of which has developed impact-investing platforms in recent years. “Over the next decade, this concept of combining people's values with their portfolios is going to become more and more mainstream,” Mr. Cordes said. “It's going to be the adviser who sits down and tells the client how to accomplish it, and brings them the investment opportunities.” Joe Keefe, president and chief executive at Pax World Management, said interest in impact investing is being propelled by research showing that a portfolio supporting environmental, social and governance goals can generate market or above-market returns. J.P. Morgan Securities and the Global Impact Investing Network released a survey May 2 that showed 91% of a group of 125 impact investors said their investments were meeting or exceeding their financial expectations. About 54% of them are targeting competitive market rate returns. The group committed $10.6 billion in impact investing in 2013 and plans to boost investments to $12.7 billion this year, an increase of 19%.

PERSONAL MISSION

Many experts agree that a second major impetus for the growth of impact investing is younger investors' profound desire to use their money to support their personal mission. “Younger investors are more inclined to have their investments aligned with their values, and they want to own companies and portfolios that focus on the same things,” Mr. Keefe said. Studies show they also want their financial professionals to provide them with opportunities that offer the double bottom line: financial return and social impact. About 29% of millennials (those born between 1980 and 2000) surveyed by Bank of America Merrill Lynch said they look to their advisers to provide values-based investing, the No. 3 most-requested service. Jennifer Kenning, director of wealth management and head of impact investing for the advisory firm Aspiriant, said impact investing is the preferred philanthropic approach for millennials, who are set to inherit about $41 trillion in wealth. "The next generation of clients is going to inherit money, make their own and give it away during their lifetimes,” Ms. Kenning said. “They want to align their mission with their investments so the two can work together.”

MORE OPTIONS

Over the past three to four years, options have expanded for investors seeking to align their capital and their values. Most of the deals that involve the greatest direct impact, however, are still available only to larger clients. These include most private-equity and private-debt investments. Steve Schueth, an adviser and president of First Affirmative Financial Network, which manages socially conscious portfolios for the clients of about 107 advisers, said that in the past 18 months he has noticed an increase in requests for more impactful investing. But most of the $865 million invested for clients is in public sustainable and responsible investments, as opposed to the higher-impact private deals, which he believes are too risky for smaller investors, such as those with less than $3 million in liquid investible net worth. “It's a real dilemma when smaller investors want to do the riskier stuff,” he said.

RESOURCES

The private side requires due diligence that the average investor does not have the resources or expertise to perform, and progress toward measured goals — or impact — must be closely monitored. Small investors don't have the time or money for that, Mr. Schueth said. But opportunities in the public markets, through mutual funds that invest in companies focused on producing measurable social impact, as well as financial returns, have blossomed from companies such as Pax World, Domini and Parnassus Investments. Pax World, for one, has seen a tremendous response from advisers. In 2005, about 75% of the assets in the fund company's investments came from retail investors. Today, 95% of assets in its funds come through financial advisers, according to Mr. Keefe. “In the adviser space, there's just a lot of increased interest in this,” he added. Hilary Irby, head of Morgan Stanley Wealth Management's Investing with Impact Platform, said not all of its 15,500 advisers have embraced impact investing. However, some advisers see this as an opportunity to help existing clients and attract new ones. About 100 third-party products are approved for investing on Morgan Stanley's impact platform, which was launched in 2012. Investments include exchange-traded funds, mutual funds and some alternatives. The wirehouse is still working to make private debt and equity investments available to investors. “We've seen a strong shift in the last 12 months around [advisers] that are seeing this as a big opportunity because they are seeing a lot of interest from clients and prospects,” Ms. Irby said. The fact that Morgan Stanley, Merrill Lynch and UBS Wealth Management Americas are creating platforms for their advisers to tap when clients are interested in buying investments that support certain causes or otherwise have a positive effect is an encouraging development to supporters of the approach. “When you have wirehouses embracing this, that's a sign it's going mainstream,” Mr. Keefe said.