Impact Investing: Considerations for Financial Advisors
Impact Investing is an increasingly popular investment approach as more investors look to align their investments with their values and make a positive impact on society and the environment. Indeed, the market internationally has seen significant growth with the Global Impact Investing Network (The GIIN) measuring the global impact market at US$1.2 trillion. In Australia, while the impact market is relatively small, it is forecast to grow exponentially to around $500 billion by 2025, from the $30 billion recorded at the end of 2021 according to The Responsible Investment Association Australasia (RIAA) data.
So what does this mean for Australian financial advisors and planners? The Australian financial advisory and planning market continues to evolve and adapt post the Royal Banking Commission. Couple this with the growth of the impact investing sector and it’s clear that there is growing impetus for financial advisors to understand impact investing and what it means for their clients.
In this article, we provide a high level overview of impact investing before looking at some of the key trends in the Australian financial advising sector and how they are relevant to the growing impact investing market.
Overview of impact investing
Impact investing is a type of investment that set out to achieve positive social and environmental impact, alongside a financial return, and measure the achievement of both. Impact investing sits within a spectrum of investing approaches between philanthropy on one side (focused on impact only), through to traditional investments (that focus on finance):
Impact investments can have a range of financial returns as well as impact returns. Some people classify impact investments according to the expected financial return as follows:
Finance-first Impact Investments: Investors intend to make environmental and/or social impacts with the expectation of an expected rate of financial return equal to or above the market rate.
Impact-first Impact Investments: Investors have the intention to make environmental and/or social impacts, regardless of whether the expected rate of financial return is below, equal to or above the market rate.
To learn more about impact investing, you can read our article here or sign up to the Impact Investing Hub Education Playbook
Trends in the Australian financial advisor market
Tighter regulation for Financial Advisors will result in education and training becoming the norm to keep up with market trends such as the growth in impact investing. The Financial Planner and Financial Adviser Code of Ethics (the FASEA Code) requires existing financial advisors to complete a relevant tertiary degree by January 2026. This sets the precedent for financial advisors to keep their training relevant and up to date. As the impact investment market grows in Australia, financial advisors will need to up skill themselves around impact investment so that they can provide suitable advice to their clients.
Investors are increasingly looking to align their financial investments with their values and using impact investing as an approach to do this. It is perhaps unsurprising with that given the extreme weather events in Australia, coupled with pressing societal issues over the past two to three years, that more investors in Australia are focusing on investments that bring about financial returns whilst also contributing to better environmental and societal outcomes, such as renewable energy projects, sustainable agriculture, and social housing. We are seeing this play out in family offices (entities that invest and manage the wealth of some Australia’s wealthiest families) and HNWIs (High Net Worth Individuals), where there is an increasing appetite for impact investment as families (driven by millennials and younger generations in particular) are focused on longevity and leaving a positive legacy. PWC research highlights that the growing use of impact investing by family offices is driven by a timeless motivation for families: ‘the desire to leave a lasting legacy and make a positive difference to society by putting their values into effect… the fundamental objective and desire to pursue impact is long-standing and is often an embedded aspect of the core purpose of many family businesses. It’s also important to stress that impact investing is here to stay not just for families and family offices, but for investors in general. The reason comes down quite simply to an expectation of better performance’.
It is important therefore that financial advisors are positioning themselves to understand and be able to advise on the impact investing market in Australia because, even if they aren’t interested in this space, it is increasingly likely their clients will be, especially as millennials set to inherit significant wealth in the coming decades. The following insights from Fidelity provide an interesting perspective on this:
Source: Fidelity
More advisors are leaving major licensees creating an opportunity to provide their clients unique value propositions. Adviser Ratings highlight that the strong growth in advisers moving towards privately-owned licensees has continued for the last half decade and is forecast to continue. Advisors may see moving to a smaller, non-bank-controlled licensee as helping them to become more independent, and to gain greater freedom in the products they can recommend, including impact investments. As the impact investing market continues to grow in Australia, independent financial advisors have the opportunity to distinguish themselves in the market by being able to provide fit-for-purpose advice on the opportunities and risks around impact investing.
Whilst demand for impact investing advice grows, most financial advisors are not resourced to be able to provide it or the due diligence on opportunities. Fidelity highlight that ‘Client interest in impact investing is showing no signs of slowing down, particularly as Millennials gradually take over a greater share of wealth. And with a significant knowledge gap among investors, professional advisor help is needed to provide guidance and dispel myths related to impact investing strategies’. Despite this, Australian Impact Investments’ Kylie Charlton highlights that ‘many investors lack the in-house expertise required to either structure or undertake due diligence, and most financial advisers are not resourced to be able to provide advice on such opportunities’. Financial advisors will therefore need to up skill themselves in this regard to be well positioned to provide such advice. One way to do this is to participate in collaborative syndicates or member networks such as Impact Investing Hub, whereby advisors can get exposure to other advisors and investors who are more adept in the impact investing market.
Source: Fidelity Charitable
In conclusion, whether financial advisors like it or not, impact investing in Australia shows no signs of abating in popularity and growth. Forward thinking advisors would be well advised to at least be familiar with impact investing, the current trends and how to connect with other more established players in this field. If you are interested in finding out more about Impact Investing Hub’s members network for advisors, you can find out more here or reach out to us via hello@impactinvestinghub.org to find out more about our education and training services for Australian financial advisors.