Focusing on the next generation of wealth owners, this interview was originally published in our whitepaper Small Sized Impact Investing Fund – Challenges and Opportunities available for free download here.
Launched in February 2017, the Center for Sustainable Finance and Private Wealth is based on the expertise of the “Impact Investing for the Next Generation” research and training program at the Initiative for Responsible Investment at the Hauser Center for Civil Society at the Harvard Kennedy School, and the Center for Microfinance at the Department of Banking and Finance, which was created in 2009. The Center’s mission is to activate private wealth and sustainable finance, at scale, as a substantial driver for sustainable development.
Falko, you have been teaching and researching with a focus on the next generation of wealth owners – the NextGens – for a substantial period of time. What has changed in recent years?
Personally, I perceive an increased level of information among the community of NextGens. You can see that every year, our participants know more about the theme which is to be discussed. I furthermore see that NextGens in our programs are more and more diligent and strategic in thinking about the various impact topics and approaches.
Which aspects do you perceive as barriers which inhibit the NextGens’ active involvement in the impact investing market?
One substantial barrier certainly lies in the fact that the NextGens are often not confident in investment and finance topics in general, and impact investing in particular. Sometimes, they feel inadequate in regard to finance, and this can definitely hinder their involvement in such topics. A second barrier simply lies in insufficient capacity in terms of not having sufficient time to engage with the field of impact investing given the substantial barriers that sometimes need to be overcome. Thirdly, the limited and intransparent service ecosystem within impact investing can be a further barrier. The product landscape is very broad and deep, and the participants are very keen to engage with the field. What is missing, however, are the intermediaries between these two forces. The majority of these intermediaries, such as private bankers or family offices, are not educated in the field of impact investing and are not immediately interested to gain such an education. Therefore, the NextGens basically need to find independent advisors, and this leads them to a market which is highly in-transparent. Those three barriers are all accentuated by one other factor, and this is privacy. Privacy as an active barrier to information distribution thus stands as the fourth substantial barrier which is keeping NextGens from actively entering the impact investing market.
One substantial barrier certainly lies in the fact that the NextGens are often not confident in investment and finance topics in general, and impact investing in particular.
What do you perceive as key characteristics of the European impact investing market?
In general, I don’t see an immense difference between the European and other impact investing markets. Europe shows a very mature product ecosystem. There is a high diversity of products, which could cover a broad spectrum of industrial needs. However, this can make it even harder to choose the one adequate product – the diversity of markets and products is aggravating this aspect, and again increases the need for good advice from intermediaries. This diversity could be rooted in the diversity of Europe itself, of its markets, its regulations, and thus of the resulting products.
How do you assess the impact investing situation in Switzerland?
In my opinion, Switzerland possesses an overall very sophisticated landscape, with powerful actors such as BlueOrchard, responsAbility, and others. The impact caused by these players definitely bears a high potential. The banks stand as another highly relevant player within the Swiss and global ecosystem, which certainly renders Switzerland a hotspot, especially regarding the larger investment funds.
What topics are the younger generations interested in?
We have recently developed a heat-map, which aims to show in which geographical and impact topic areas high net worth investors perceive to find an adequate offering of investment options, and where finding adequate investments remains a tougher challenge. Here, we could perceive a generally high interest in all topics revolving around water and agriculture. There is also big interest in the topics of climate change, food, and fashion, and circular economy concepts. Location-wise, there is a strong interest in the respective home market. However, most investors are also open to developing markets, especially if an increased impact can be realized.
At the same time, investors can also be reluctant to enter developing market because of the inherent risks – perceived or real – as well as costs, and the need for intermediaries. We often perceive that our participants from developing countries, such as Asia or Latin America, have very high return expectations, because they are used to this from previous experiences. If such a local investor then looks at impact investing opportunities in China, for example, that are provided by Swiss managers, then this investor could be unsatisfied with the return of the project. The reason for this is that for the Swiss manager, the project might seem risky, and grand supervision and monitoring efforts were implemented, while local investors would perceive it less so. These monitoring costs then take away a share of the project returns.
Where do you see a need for action in order to increase the impact investing volume?
Certainly, more projects promoting the awareness and managing the information load around the topic of impact investing will need to be implemented. Moreover, exact and effective impact management will also stand as a highly relevant task. Thirdly, we clearly need increased numbers of well-informed intermediaries within the market. Here, some large banks have already significantly ramped up their investment capabilities, whereas the smaller banks have not yet followed this trend. Right now, we have an opt-in model, meaning that you actively have to decide to pursue an impact investment and search for such options. Similarly to organ donations, an important disruption can be realized through switching from an opt-in to an opt-out model, where investments can be of an impact-nature by default. I think that this could be realized, at least partially, through the introduction of new respective laws at the EU level, and these efforts definitely will have to be taken further.
Do you perceive foundations, and the philanthropy sector in general,
to play a relevant role within the topic of impact investing?
In our perception, foundations show up much less to current discussions, for example about possible blended finance approaches which would include these foundations as a financing actor. I am not very close to the foundation landscape, however, my impression is that most foundations have a rather strict, slow and innovation-prohibitive internal architecture. They are aware of impact investment as an important topic, and some of them want to engage with the topic, but they simply operate in a very slow fashion – regrettably so, because foundations could and should play a key driving role here, and could greatly benefit at the same time. It’s time for foundations to pick up pace – the solution – and information ecosystem is ready.
This interview was originally published in our whitepaper Small Sized Impact Investing Fund – Challenges and Opportunities available for free download below: