Getting Started

The Rise of Individual Impact Investors

While institutions have fueled the significant expansion of impact investing over the past decade, recent growth has come from a new segment: individual impact investors.

The rising numbers of individual impact investors could be driven by a number of factors, including both an increasing awareness of environmental, social, and governance (ESG) issues and the introduction of more mutual funds with an impact investing focus. Growing concern over the effects of climate change and income inequality may also be a factor.

While a number of industry surveys show increased appetite for retail funds that follow ESG or sustainability goals, they also indicate several challenges for the category to truly take hold—which may in part explain why institutions have historically dominated the impact investing space.

Individual Impact Investors by the Numbers

Assets in impact investing strategies had grown to nearly $23 trillion as of 2016, an increase of 25% in two years, according to the Global Sustainable Investment Review. US assets stand at $8.7 trillion. Institutions account for $8.1 trillion of that amount, though assets held by retail investors doubled from 13% to 26% during the same time period.

A January 2018 report by Morningstar found that more funds than ever incorporate ESG or sustainability goals across 56 equity and bond categories, with positive short- and long-term performance. Assets under management and net flows have reached all-time highs, and investment choices include both active and passive strategies.

Morningstar now tracks 235 active and passive funds that incorporate ESG criteria, pursue a sustainability-related theme or seek measurable sustainable impact alongside financial return. It excludes funds with values-based screens to best reflect the category.

Another survey of 1,000 investors by Morgan Stanley found growing interest among individuals, with millennial investors the hungriest for sustainable investing options. While women still lead men among individual impact investors, the gender gap is also narrowing. In addition, investors surveyed said they’d be more likely to invest if they could customize portfolios to their own interests.

The Path to Growth—and Why Institutions Have Led Thus Far

Yet assets held by individual impact investors still comprise only a small segment, and challenges remain for the category to truly take off. Sustainable funds account for only 3% of the overall retail mutual fund universe, Morningstar found.

Of the 235 funds it tracks, 102 do not yet have a three-year record and 100 have less than $50 million in assets. It noted that many of the funds have varying investment guidelines and said that more due diligence will be necessary to understand the differences in their approaches to sustainability.

As impact funds build longer track records, it may also help to dispel a longstanding perception that investors must sacrifice performance for their values, the Morgan Stanley report found.

Nonetheless, many in the industry expect the category to continue to grow—for both institutions and individuals. For example, a Greenwich Associates and American Century Investments survey of third-party RIAs, broker/dealers, private banks, and insurance companies found that 80% expect to see strong growth over the next three years. Though the category is in its early stages, there is a “clear and growing desire” for impact investing solutions among high-net-worth investors and individuals.

Given that individual investors often have increased tax considerations in allocation changes compared to institutional investors, the growth could be at a slower pace.

More broadly, the future of impact investing will hinge on the industry’s ability to strengthen its identity, among a number of other key priorities, according to a new report from the Global Impact Investing Network. The industry will need more education, policies, and performance incentives to foster healthy growth.

FacebookTwitterGoogle+LinkedIn
FacebookTwitterGoogle+LinkedIn