Banks and Wealth Management institutions today are at the crossroads of the above-mentioned emerging trends. By virtue of their business model, they are plugged into clients across the wealth spectrum, from middle/affluent to ultra-high net worth. Strong relationships, combined with research and technology are the cornerstone of their business’. In an ironic twist, the regulators are concerned that wealth managers are so close to the clients that they are at risk of putting their clients interest ahead of the regulator’s.
This presents these institutions with a very valuable opportunity in expanding economic development beyond the traditional model of governments and charities. They can be the catalyst that influences the choices of their customers, and help to channel a fraction of invested wealth towards funds for economic development.
But this is not to be confused with Corporate Social Responsibility or CSR, which has been around for some time and is now embedded in the strategic vision of almost all businesses. CSR has evolved from a reporting driven function, to a mainstream business strategy constituent with a direct contribution to the firms’ value. As an example, DBS in Singapore has a separate offering for social enterprises and views them as different from business enterprises. This recognition alone is representative of the progress that CSR has made in organisations.
Wealth Management businesses today have the opportunity to advance CSR from strategy to making it a part of their core business of managing wealth. They can do this through embracing Impact Investment and ingraining it in their business.
In 2010, JP Morgan, in collaboration with Rockefeller Foundation and Global Impact Investment Network (GIIN) published a report which asserts that impact investing constitutes a new asset class. Over the last decade, impact investing has gained traction among a wide range of investors and is now viewed as an appropriate and economically effective way to complement government and philanthropy in making the world a better place.
Read ahead for impact investment.
This change in investing behaviour is a significant turning point for economic development. Firms can and should raise the awareness of impact investment funds with clients, as they go through the investment process and influence their choices. They can also provide the investment vehicles for clients who wish to participate in the economic development activity directly.
And this awareness is the perfect foundation to build a robust market for the stakeholders of impact funds. Back in the early 1900s when the fledgling mutual funds industry started taking root, there were challenges of regulation, transparency and acceptance of these unit trusts, as a financial instrument. Today, the mutual fund industry has established itself at the forefront of wealth management. Similarly, there will soon be a governance framework for impact investing related funds, that will get robust, and akin to any other young industry, we will learn from mistakes as we stumble along. Over the last decade alone, there has already been significant contribution to developing the framework for measurement and benchmarking of such enterprises, and more will follow.
While impact investment will probably never overtake traditional and more profitable investment vehicles, they deserve a place on the menu of products offered by wealth management firms.
Impact investing is small in scale today, but is poised for scale and efficiency in the new future, and with that will come growth. We have already seen some migration of talent from mainstream private equity or venture capital professionals to impact driven enterprises. The choice to be made is whether financial institutions should join this growth, and help accelerate it, or stay behind. If wealth management firms make this choice, they can take economic development to new heights, with an international and collaborative stakeholder base across the globe.
The choice will come with a cost. Here’s an unrelated but relevant example. The Green Reward scheme launched by NTUC Fair Price in 2007, involved giving a rebate of 10 cents to customers who brought their own bag. While the impact of this initiative led to an addition of SGD 2.8 million to total cost of business, so far, they have achieved an impressive savings of 56 million plastic bags, which should make a significant impact on the environment.
This serves as a reminder that while profit maximisation is the primary goal, social goals can also find a place alongside financial goals.
It helps maintain moral equilibrium too.
