Millennial investors stand to inherit $30T of potential assets from baby boomers. To attract and retain this next-generation of investors, advisors need to offer sustainability, clean energy, and social impact investing strategies.
Impact investing — allocating or withholding investments based on environmental, social, and governance (ESG) principles — has been largely driven by high net worth (HNI) individuals like Bill Gates and Bono.
Now individual investors are turning their attention to the social impact of their portfolio investments and seeking out these “double bottom line” investments.
A new crop of wealth tech startups, including robo-advisors Motif Investing and Wahed Invest, are creating low-account minimum, low-fee investment products aligned with investors’ social, religious, or economic values.
What’s at stake?
Millennials stand to inherit approximately $30T from their parents, the baby boomers, in the coming decades, and both upstarts and advisors are vying for a piece of the pie.
Startups are especially well-positioned to establish credibility with young investors because many do not trust banks after the 2008-2009 financial crisis. Already robo-advisors like Acorns have had success with digital-first investment products that offer low fees and better digital interfaces. Now these companies are specifically targeting younger investors with an emphasis on social impact investing.
While it is an open question whether this supposedly fickle demographic will stay loyal to upstart investing platforms as they grow wealthier, incumbents that fail to gain traction with newer investors could miss out on a big long-term opportunity.
Using CB Insights’ trends tool, we see that the term impact investing has been on the rise in the media for the past few years. However, it’s recently gained notable traction and we believe it is still early innings. We expect impact investing to be a major trend in 2018.
In this brief, we look at why we’re watching impact investing and spotlight a few wealth tech startups helping investors pad their portfolios and their conscience.
There are massive demographic shifts underway in wealth management. Millennials are now the largest generation in the workforce and 2x more likely than the average investor to make a sustainable investment.
Social issues like climate change and gun-control are top of mind for the next-generation, and 75% of millennial investors believe their investments can influence change, according to one survey conducted by Morgan Stanley.
Further, impact investing is a growing part of the wealth management market. In 2016, it’s estimated that sustainable investment assets grew to $22.89T globally, up 25% from 2014 according to the Global Sustainable Investment Alliance (GSIA).
Though many institutions have a wealth management division that offers socially responsible investment (SRIs) funds, in many cases only HNIs can meet the financial qualifcations and accredidation requirements to invest.
Under pressure from investors, we anticipate insitutions will look for new ways to grow their impact investing strategies. Goldman Sachs for example, acquired Imprint Capital, an ESG invesment fund in 2015 and lauched an invesment arm dedicated to impact investing as part of the Asset Management (GSAM) group.
Next-gen wealth management platforms
Startups like robo-advisors Motif Investing and Wahed Invest are leveraging 2 types of impact investing practices, positive and negative screening respectively, to empower investors to make investments that align with their beliefs.
Motif Investing’s Impact Portfolios use “positive screening” to align investor’s financial goals with their values — like mitigating climate change — and charge a competitive 0.25% flat annual management fee.
Motif offers a B2C digital platform that allows investors to sign up directly with Motif and a B2B white-label that is already being used by Goldman Sachs and JP Morgan Chase (which also invested in the company), among other institutions.
White-labeling Motif’s software is one way large institutions can offer impact investing portfolios to mass affluent customers and compete for the next-generation of investors without having to build the platforms in-house.
Wahed Invest is a halal-focused automated portfolio advisory that appeals to Islamic investors because all investments go through “negative screening” to avoid investing in companies — such as alcohol, tobacco, arms, and gambling companies — that contradict their investor’s religious beliefs. Wahed is currently exclusively a B2C platform.
Beyond robo-advisors, Swell Investing offers taxable brokerage accounts and individual retirement accounts (IRAs) that let investors select from thematic funds based on ESG principles. This inlcudes funds like “green tech,” which holds positions in Eaton, a manuafaturer of hybrid power products that conserve energy spending.
Aspiration is another impact investing-focused company which provides digital retail banking and investing services like checking accounts, and donates a percentage of the company’s revenues to charities.
In 2018, as young people show continued engagement with social issues, we expect the demand for ethical investment vehicles to grow. And as these products become more mainstream, we may see demand for ESG investment products rise among incumbent financial institutions’ older clients looking to align their portfolios with their values.