Impact Investing: What It Is and How It Can Impact Your Clients Retirement

An older woman who values impact and commiunity volunteers smiling

Driven by Millennials and Gen X interest, impact investing can act as a catalyst for retirement saving as individuals focus on a impactful investment —from sustainable agriculture to renewable energy, conservation, and micro-finance.

In addition to the macroeconomic trends in sustainable investing, updates from regulatory agencies, shifting consumer investor preferences, and demographic changes across the country all point to the continued, rapid growth of sustainable impact investing as individuals retire. What does this type of socially conscious investment mean for retirement planning, retirement income, and yield?

What is impact investing?

Impact investments aim to generate positive, measurable social and environmental benefits alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on the investors’ strategic goals.

Environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing are industry terms often used interchangeably by clients and professionals alike.

  • ESG refers to the environmental, social, and governance practices of an investment that may have a material impact on the performance of that investment.
  • Socially responsible investing goes one step further than ESG by actively eliminating or selecting investments according to specific ethical guidelines.
  • impact or thematic investing, positive outcomes are of the utmost importance—meaning the investments need to have a positive impact in some way.

Common Areas of Investment for Impact Investors

Environmental, social, and governance (ESG) investing proactively considers ESG criteria alongside financial analysis to identify opportunities and risks during the investment process. ESG investing considers corporate practices such as natural resource utilization, human capital, policies, and board governance.

Today, there are a number of investment products available to retirement investors that support sustainable and impact investing practices, including mutual funds and exchange-traded funds.

Who is interested in ESG Investment for their retirement?

According to a 2019 Morgan Stanley survey, among participants with access to 401(k) options as of 2019, 88% of individual investors expressed interest in sustainable 401(k) options with 95% of Millennials expressed interest in sustainable 401(k) options. Millennials outnumber Baby Boomers, and an estimated $30 trillion in wealth will transfer to younger generations in the next 30-40 years. According to Nationwide, millennials, women and ultra-high-net-worth investors are driving interest and assets in ESG investing.

However, it’s not just Millenials who are driving ESG investments for retirement; other generations are also recognizing the value too an ESG retirement diversification tool. The percentage of high-net-worth investors who agree that ESG is important to investment decision-making has increased: 

  • Generation X: 65% Agree that ESG is an important factor in decision making.
  • Baby boomers:  48% Agree that ESG is an important factor in decision making.
  • Silent Generation:  38% Agree that ESG is an important factor in decision making.

This has the potential to significantly change both the sustainable investing trajectory, retirement preferences, and the investment landscape in general.

The Return on SRI, ESG and Impact Investing

There was a public misconception about the return on ESG or impact investments being lower than average returns. According to an study, 88 percent of respondents’ financial returns were either in line with or exceeded their expectations. Likewise, 99 percent of respondents claimed that the impact made through their investments equaled or outperformed their expectations.

Sustainable and impact investments, including those that incorporate environmental, social and governance data as part of the selection process, may be suitable for retirement plans given their ability to achieve returns consistent with traditional benchmarks and investment strategies without taking on additional risk.

Why might that be? It would make sense that companies with good governance, resilient supply chains, and sustainable business practices would be better placed to weather downturns. With the ESG data available today, retirement focused, savvy investors can increasingly find companies with strong balance sheets, competitive advantages, and lower volatility than their mainstream counterparts—things that are important to a company’s financial results.

Has your client asked about their retirement and how it supports an ESG strategy? Many carriers are exploring ESG retirement options albeit limited across annuities. Contact your DMI Sales Representative to explore the wealth of carriers that we have built relationships with for the benefit of your client.