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Big firms join race for investors looking to make an impact
If you haven’t heard of impact investing yet, just wait. It’s one of the hottest areas in investing, and the industry is racing to offer more opportunities for people to put their money into investments that deliver a positive impact on the world, along with positive returns. Think: projects and stocks of companies that are providing clean water or looking to prevent disease.
This formerly niche corner of investing has become increasingly mainstream, partly because it offers a tantalising opportunity to target millennial customers. Big-name players are getting involved, such as Morgan Stanley, which has created an Institute for Sustainable Investing and recently raised more than US$125 million for a global impact fund.
The prominent venture-capital firm Andreessen Horowitz is backing OpenInvest, which matches people with socially responsible investments. All the new entrants are bringing more credibility to the field, but they’ve also coincided with some growing pains.
Swell, a company backed by the insurance giant Pacific Life, is one of the latest entrants and offers a case study of how keen the industry is to tap into impact investing’s growth. Swell launched last month, but it’s already gone through a couple iterations.
After its first prototype didn’t attract enough customers, Swell partnered with, of all things, a design company to help in its construction. IDEO is the same firm that designed Apple’s original computer mouse, and it helped Swell develop everything from its web site to its philosophy on hiring.
The stakes are high.
Sustainable, responsible and impact investing accounted for US$8.7 trillion last year, or US$1 of every US$5 under professional management, according to US SIF, a trade group. That’s up 33 percent in two years, and it far outpaces the 5 per cent growth for US-registered investment companies overall.
With the recent US pullout from the Paris climate accord, one school of thought says impact investing could get even more popular. If Washington is leaving more environmental issues to the market to decide, some investors want to be sure to steer their dollars toward companies that they see as helping.
The fast growth is not universally welcomed. Investors who have long been in the space are encouraged to see big-name firms enter, but 71 percent of them also say it introduces the risk of “mission drift or impact dilution,” according to the latest survey by the Global Impact Investing Network.
At Swell, the company’s own approach has shifted as it heard more from customers about what they want.
It started in 2012 when Dave Fanger, a financial actuary working in mergers and acquisitions at Pacific Life, wanted to help people invest with their values in mind. He launched Swell and partnered with an online broker, and its first prototype came out in 2015.
It allowed investors to choose from four portfolios, each filled with stocks of companies whose foundations are big contributors to causes, such as “Improve Education.” Macy’s stock was in the “End Cancer” portfolio because it donates to cancer research, for example.
But not enough customers were actually signing up. So Fanger, who was in business school at the time and had been learning about IDEO and its theory of design thinking, got in touch with the firm through a contact at Pacific Life.
After IDEO came in, they quickly zeroed in on a couple issues. One was that Swell’s site pushed users to another web site, the broker’s, to actually invest their money.
“And there was a gap between the promise of investing in companies that make the world a better place and the companies in the portfolio,” said Bryan Walker, a partner at IDEO. Instead of investing in companies whose foundations donated to causes, customers wanted to put their money into companies that were directly doing things themselves. So, more a Mohawk Industries, which recycles plastic bottles to make carpet, than a Macy’s.
Swell now offers six portfolios to invest in, each filled with stocks of companies looking to make changes in a certain field. Mohawk is in the “Zero Waste” portfolio, along with LKQ Corp., which recycles auto parts. The “Green Tech” portfolio includes electric-car maker Tesla Motors and Xylem, a water technology company.
IDEO and Swell also put together prototypes to test what customers wanted. They asked whether customers were willing to give up some returns in exchange for greater social impact (they were not) and whether they preferred something with bigger risks and bigger potential rewards or something that was more stable (they wanted to go big).
Through its prototypes, Swell and IDEO also gauged what customers were willing to pay in fees. They set the minimum investment at US$500, with an annual fee of 0.75 per cent, or 75 basis points. Testing showed that customers didn’t know what a basis point was, so the web site says that it amounts to about the cost of a cup of fancy coffee, US$3.13 per month, on a US$5,000 investment.
With its specialised approach, Fanger acknowledges that it’s likely to be a supplemental part to someone’s investment portfolio. But he hopes it broadens out.
“This is the start,” said Fanger. “This is the Tesla Roadster, where now they’re talking about the Model 3 for everyone. Or how organic foods started as a small section in the grocery store. As people become more aware, we see it becoming more common.”
STAN CHOE, AP Business Writer