Myth busting's part of the job in impact investing
Scott Reeves has faced so much skepticism about what he does at U.S. Trust that he now welcomes the chance to challenge people's misconceptions.
"I'm actually starting to enjoy getting the question" about returns on impact investing, said Reeves, a portfolio manager at the Bank of America wealth management unit. "It really gives us the opportunity to highlight the benefit of our approach, and why our approach can lead to better investment outcomes."
The question is usually phrased with a negative spin: Don't impact investments — which are made with the intention of fostering social or environmental benefits — underperform?
Put another way, don't you have to sacrifice profits for purpose?
Reeves and others involved in the impact sector answered with a resounding "no" during a recent conference titled "Diversity Driving Revenue" that the investment bank Big Path Capital hosted in New York City.
Interest in impact investing is expected to continue growing, fueled in part by women and millennials, and more financial institutions are taking notice. But the idea is still outside the mainstream, so fittingly a portion of the panel discussion with Reeves focused on the myths that participants spend the most time debunking. Disbelief about financial worthiness is one they all seemed to have in common.
Sunwoo Hwang, the founder and chief executive of Sixup, said he doesn't emphasize the social mission behind his San Francisco startup, partly to avoid that extra layer of skepticism.
Sixup is an online lending platform that aims to help high-achieving, low-income students attend four-year colleges. Hwang describes it as a SoFi for "the other 99%."
Borrowers can get $5,000 to $15,000 a year to fill the gap between the financial aid they receive and the cost of their tuition, and parents do not have to co-sign.
Sixup's target group carries a lot of stigma in the financial community, Hwang said. "These students get lumped into subprime, loser prime, risky prime," he said.
To get past the preconceived notions, Hwang started using the term "future prime" instead, which he said has helped overcome some initial resistance to his pitch about why these students are a worthwhile investment.
For Elizabeth Chou, of New Markets Venture Partners, a bias in favor of established funds is her biggest hurdle.
"Everyone thinks that investing with small managers or emerging managers is risky," she said.
But large firms rely on track records established over the years by fund managers who might no longer be involved in that portfolio, said Chou, who is a partner at New Markets. And sometimes the interests of large firms do not align with those of investors.
"I spend my life telling people that investing with established managers is actually riskier," she said.
Reeves is part of the socially innovative investing team at U.S. Trust — S2I for short. It launched in 2010 around a suite of investing products that took onto account diverse environmental, social and governance factors, he said. But a few years in, U.S. Trust found that many of its high-net-worth clients started to "cluster" their attention on specific themes.
"As a result, starting in 2013, we developed two new portfolios that are much more focused in nature, one of which is called our Women and Girls Equality Strategy — we call it WAGES for short — and the second is our Human Rights and Recognition Strategy — which we call H2R for short," Reeves said. "And those are really kind of extensions of our diversified approach with just a greater focus on diversity, inclusion, social justice and the like."
Despite the social goals, Reeves said the team is entirely data driven and gathers insight from many sources. "We consider ourselves to be quantitative investors really," he said.
But two questions they ask about every potential investment likely differ from those of mainstream portfolio managers.
The first is, do companies have the right intentions? In other words, "do they have the right policies around things like family benefits?" Reeves asked. "Are they transparent about their hiring practices and their track record around hiring and promotions?"
The second is, are those policies actually leading to the right outcomes?
An emphasis on both intention and results helps weed out pretenders that are just "green washing," Reeves said. "You can't cheat the hard numbers."