- GIIN: Why did UBS decide to engage in impact investing?
- Mario Marconi:
We started engaging in impact investing primarily due to client demand, especially from sophisticated philanthropic and family offices. In addition, our own assessment of the market is that interest in achieving sustainable social impact through an investment approach is a deep, long-term economic trend. We firmly believe that more private capital is needed to address societal and environmental issues, because there is a large gap between the amount of money needed and the amount currently available to address these issues. We need to explore approaches that can complement the traditional funding sources of government and philanthropy to address social and environmental issues, and combining social impact and financial return is, from our perspective, the approach that will attract most private investors to activate capital.
- GIIN: How does impact investing fit in with UBS' other offerings of socially responsible funds and philanthropic advising?
Values-based investing is an umbrella investment philosophy, whereby investors can go beyond pure financial considerations when making investment decisions to integrate values like sustainability and social impact. Impact investing is one way to achieve these goals. More mainstream approaches are socially responsible investments (SRI), which integrate environmental, social, and corporate governance (ESG) considerations in investment decisions. Impact investing is more niche, though we hope it won't remain so.
- GIIN: How do you introduce the concept of impact investing to your clients?
Investors don't yet know exactly what they are looking for, but they are very interested in impact investing as a small part of their portfolio. It is hard to predict how clients will react to impact investing at this early stage in the industry. We try to put forward solutions, ideas, and opportunities to clients to help them integrate their particular values, and when impact investing can tangibly demonstrate what it can deliver, investors will respond.
The message changes to match the particular investor's background. Investors who aren't familiar with impact investing have a tendency to put the concept in either a philanthropy bucket or a private equity bucket. Thus, if our client is a philanthropist investor, we emphasize the investment's social dimension. If the client is an entrepreneur investor, we first note the financial opportunity.
However, there is an emotional component that we try to bring to the clients. It's not just about the financial numbers, but also the story.
- GIIN: Conversely, is there a way that you recommend investors approach this subject with their wealth advisor?
I think both the wealth management industry and the investor community need to increase their understanding of impact investing, which is the most important challenge we face. Therefore, if an investor brings the topic to his or her wealth manager, the manager has a duty to trigger an internal discussion if she or he is not up to speed on the topic - which is currently common in the industry. The challenge, then, is how to make the discussion around the value proposition of values-based investing more tangible and understandable to both the wealth management industry and the investor community.
- GIIN: What types of clients are leading the demand for impact investment products in Europe?
The types of clients leading the demand for impact investment products often come from a philanthropic or family office background; I call them innovators or early adopters. These are the people who are most interested and can act faster than institutions such as pension funds or large charities.
- GIIN: Do these innovators expect a range of financial returns, and do they see a tradeoff between financial and social returns?
I think they understand that they may need to give something up on the financial side for social return. The question is always, how big is that tradeoff? At this early stage, it's very subjective. As long as we can make a tangible case for social impact, we can begin a rational discussion about expected financial return, and will talk about internal rate of return, multiples, and everything else. It is more difficult to talk about the social dimension, because consistent, widespread performance standards and a way to discuss social impact in a tangible way are not widespread.
- GIIN: What sectors and regions are clients most interested in?
Given that we have a global client base, our investors have a variety of interests, though they tend to be regionally focused. Interests include small and medium enterprises (SMEs), which resonate well with our clients given that many are entrepreneurs themselves, as well as specific sectors focused on basic needs such as education, agriculture, and health care. The regional focus seems to be of higher priority in developing countries, particularly in Asia where there is interest in focusing activity on overcoming social issues. For example, some of these investors see impact investing as an extension of their philanthropic arm, and as many philanthropic activities are regional, clients want to see impact investments focused on local issues.
- GIIN: Where do you see trends in impact investing activity?
We believe that Asia will take a leading role in impact investing, for a few reasons. Many countries in that region are growing at incredible speeds, creating tremendous amounts of wealth and thus new investors. However, Asia also has a large need for impact investments, because the region has the largest number of poor people living under one dollar a day. Finally, many of the new high net worth individuals are entrepreneurs interested in integrating new investment approaches, and impact investing resonates with them. This combination of recent wealth, the affinity to the topic, and the regional need signals high potential for impact investing in Asia.
- GIIN: How do you find opportunities for investment in different regions?
We work with local partners and fund managers. We cannot find investment opportunities for a global client base from Zurich, London, or New York. Working with local partners is important for the development of impact investing in general because more opportunities will be identified. From our perspective, it is important that we work with the right people in the field. However, it is very difficult to find local partners with a solid track record.
- GIIN: How will you determine if and how your investments have made social or environmental impact?
- GIIN: Impact Reporting and Investment Standards
- GIIN: Is impact measurement motivated by your clients' demands or an internal accountability to social impact?
It is both. Investors today have different understandings and interpretations of impact investing. They want to see social impact to understand the story behind the investment, and understand what we are trying to achieve. Investors are definitely looking for some commitment to impact measurement. We firmly believe that for the industry to develop and become mainstream, measurement will need to be widely addressed and adopted. Otherwise, we will not be able to communicate clearly as a sector, and it will be difficult for impact investing to reach beyond a niche market.
- GIIN: Has the economic crisis affected the appetite for impact investing among your clients?
Investors are still trying to achieve a mature financial dimension when looking for investment opportunities, and they have a well-structured approach to getting what they want. However, we feel that there is a deep trend of change in certain societal values, and the financial crisis is accelerating the growing awareness of social and environmental issues. In the emerging markets of Latin America, Eastern Europe, and Asia, there are large pools of capital ready to be activated to address these issues. These elements all contribute to the trend toward values-based investing.
- GIIN: What additional tools and market infrastructure are needed to get clients to make impact investments?
Scalability, opacity of the market, and the lack of infrastructure in capital markets are definitely issues in the industry. The impact investing industry is at an early stage and needs to better clarify its value proposition to investors. We need a common terminology to discuss impact investing, and a broader understanding of what the terms mean. More people need to use standards to discuss and measure impact. Impact investing can move from niche to mainstream when industry stakeholders can communicate properly with the investor community.
A note to readers from the GIIN:
Diversity is a hallmark of the impact investment market, which has attracted traditional financial institutions, pension funds, private foundations, government-funded development finance institutions, fund managers, high-net-worth individuals, and family offices. As a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing, the GIIN aims to bring transparency to this market and to the practice of impact investing. To this end, we believe it is in the interest of the field to share a sample of the diverse viewpoints held by investors who are motivated by social and environmental considerations. The publication of such diverse viewpoints, however, should not be construed as an endorsement by the GIIN of those viewpoints or the individuals or institutions expressing them.