The Future of Impact Investing

Millennial investors say they seek a social return along with financial gains. Time for financial planners to hear the message.

In his keynote address at a 2013 G8 Conference, British Prime Minister David Cameron voiced his support for impact investing, believing that European governments should do more to support socially responsible investments. The World Economic Forum has predicted the impact investment market will grow to $500 billion by 2020. Other analysts place the figure closer to $1 trillion.

Despite all the enthusiasm surrounding impact investing, many of my colleagues in the field of financial planning remain uninformed. According to a CFA Institute report, 66% of advisers admitted to being unfamiliar with the practice. I believe the continued growth of this worthy field will depend on educating financial advisers and investors.

A major reason for this expected growth is the impending transfer of wealth from parents to their children. Millennials and Generation Xers stand to inherit between $30 and $40 trillion dollars from the baby boomer generation. The magnitude of this wealth transfer is unmatched by previous generations.

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Beyond simply the size of the inheritance, Millennials have different priorities than the generations before them. Younger investors seek investments that yield a social return, as well as a financial one. When asked about the primary purpose of business, 36% of Millennials selected “Improve Society” as their answer. Other answers included “Enable Progress,” which was chosen by 25% of participants, and “Create Wealth,” which was picked only 15% of the time (Deloitte Survey, 2014).

In the past, investments in emerging or non-traditional markets were viewed as exceedingly risky. A lack of transparency and available information discouraged investors from exploring opportunities abroad. The digital age has changed that. Enhanced connectivity now makes it possible for investors to act wisely when investing in emerging markets. Moreover, the credit ratings in many developing nations—such as Mexico and Brazil—have improved as governments exercise greater fiscal responsibility. This development creates more opportunity for impact investing.

Investing for gender equality is rapidly becoming one of the most popular forms of impact investing. The goal is to promote gender parity and personal empowerment through debt and equity investments.

There are three basic types of gender-equality investments: supporting female-owned enterprises, funding companies that offer products and services for women, or expanding employment opportunities for women. Organizations such as the Calvert Foundation and Root Capital have launched initiatives to promote gender-focused investments. To quote Jackie VanderBrug, managing director of Criterion Ventures: “Women are key assets in combating poverty, building their communities, and creating new pathways to a more just and sustainable world. Investing in women’s education, economic welfare, health, and overall well-being produces powerful results that benefit families, communities, and entire societies. When women become economic agents and leaders, social change accelerates and returns multiply.”

Foreign investment in developing countries dropped 16% in 2014. This has resulted in a $2.5 trillion funding gap, which has made it nearly impossible for these countries to cope with chronic problems such as food and water shortages, limited healthcare access, and failing infrastructure.

Similarly, the clean-energy sector is experiencing a major capital shortfall. The International Energy Agency calculates that an additional $36 trillion will be needed over the next 35 years to curb the most extreme effects of climate change.

Since philanthropic activity alone cannot bridge the gap, I believe advisers must educate themselves and their clients on impact investing. Our globalized economy has made it possible to engender social change and produce a healthy return on investment. Whether we can find solutions to the most pressing global challenges will depend on the commitment and foresight of investors.

Marguerita M. Cheng is the Chief Executive Officer at Blue Ocean Global Wealth. Marguerita is a spokesperson for the AARP Financial Freedom Campaign and is often featured in national publications. As a CFP Board Ambassador, Marguerita helps educate the public, policy makers, and media about the benefits of competent, ethical financial planning. She proudly serves on the FPA National Board of Directors and is a frequent speaker on on financial planning, Social Security, diversity, elder care, and retirement.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Marguerita M. Cheng, CFP®
CEO, Blue Ocean Global Wealth

Marguerita M. Cheng is the Chief Executive Officer at Blue Ocean Global Wealth (opens in new tab). She is a CFP® professional, a Chartered Retirement Planning Counselor℠, Retirement Income Certified Professional and a Certified Divorce Financial Analyst. She helps educate the public, policymakers and media about the benefits of competent, ethical financial planning.