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Welcome to the Guernsey Finance podcast page.
Our podcasts bring you all the latest news and insight from Guernsey, the global finance specialist, as well as audio from some of our online events.
Brandon 0:05
Hello and welcome to the We Are Guernsey podcast where we bring you interviews with leaders from the global finance industry, as well as news and developments from Guernsey's financial services sector. My name is Brandon Ashplant and I am Senior Strategy and Technical Executive here at Guernsey Finance. For those not familiar with Guernsey, the island is a leading global finance center. The success of the industry here is underpinned by economic substance, political stability, and asset security, and we are committed to the cause of sustainable finance. To find out more about Guernsey's success in sustainable finance tune into our sister podcast, the Guernsey Green Finance Podcast. Today I am delighted to be joined by John Pepin, Chief Executive of Philanthropy Impact UK, and Justin Sykes, Founder and Managing Director of Innovest Advisory. John has 20 years experience as a Social Entrepreneurial Consultant working for over 300 charities internationally, he spent 15 years as a Chief Executive of various Canadian charities prior to taking up his current position. Justin is an Impact Investment Specialist with over 20 years experience focusing on deploying private capital to vulnerable populations to create better opportunities. Today, we will be exploring the drive behind professional advisors trying to better understand their client's respective values and how this informs investment decision making. So without further ado, welcome both.
John 1:29
Thank you.
Justin 1:31
Thank you very much.
Brandon 1:32
So starting with yourself, John, please could you just kind of outline your career to date?
John 1:38
Well, you sort of did it with the 15 years. So my specialty in Canada was going into charities that were facing difficulties, and helping to grow them and to develop new ways of delivering service. So I was amongst the first in the 1980s to develop social enterprises and commercial opportunities as part of a charities service and a franchised one, so it's quite deviant kind of activity at that time. I set up a consultancy, to help third sector organisations to become much more entrepreneurial and to grow and to be strategically strong in that way and look at different ways to diversify revenue. And then I've ended up with Philanthropy Impact, I've been here for eight years. We work with professional advisors and ultra high net worth individuals, so private client advisors, tax lawyers, private banks, wealth managers, etc. And what we're trying to do is work with them to help them to respond to the changing needs of private clients, and how to support those clients in a number of different ways across a spectrum of capital. So it could be that some of them want support on their philanthropic journey. Many of them want to live their values through their investments. And so we help advisors respond to those changing needs.
Brandon 3:16
Great. And just to follow up with Justin, how did you end up founding Innovest Advisory?
Justin 3:23
Thanks, Brandon. So my background for over 20 years has been working at the nexus of private asset owners and their wish to deploy capital for purpose objectives primarily around social justice, job creation and economic development. And in my last role before starting university I was working for a large foundation in the Middle East. And that foundation was set up to create jobs for young people in the aftermath of the Arab Spring revolutions. And initially, that foundation was operating on the basis of a venture philanthropy model so giving philanthropic funding away to organisations with the objective of those those donations creating lots of jobs, and pretty much in every conversation from Casablanca through to Baghdad, the intermediaries in the countries were saying we don't need grants, we actually need debt, or we actually need equity and by giving us that type of repayable capital, we can invest it in businesses, or we can create intermediary organisations such as SME banks and microfinance institutions that then themselves on-lend and invest into entrepreneurs. And that's how you create jobs. So we listened to that feedback and ended up creating a $50 million impact investment fund with basically two purposes. First and foremost, it looked at deals across 12 countries in the Arab world and said, will these investments create jobs at scale for young people? And that was the first tick box. And if it didn't, they weren't even considered any further. And then secondly, we looked at those deals and said, will we be able to invest in these projects and at least achieve capital preservation, i.e. we get our money back, protected against inflation. And if it ticked that second box, then basically an investment will go ahead. And I think that experience of building a large scale fund, that could invest, protect its capital, and achieve significant social impact, and we created around 2000 jobs through that facility, that experience really led me to think that actually, this whole space of applying what were traditionally charitable and philanthropic objectives, but now through a lens of repayable capital andmarket based instruments is a huge market that is nascent and need support to develop. And really, that was the origin of Innovest and we've been building out our services over the last six years, seven years now.
Brandon 6:26
Fascinating, brilliant. Well, let's jump straight into things. John, what is driving professional advisors to get involved in conversations with clients about their values?
John 6:37
I think there's a number of issues that are going on. One is the shifting values of millennials, Gen Z and wealth, they want a new kind of wealth management, and what we're finding in our discussions with very wealthy young people, high net worth and ultra high net worth young people, is that if their advisors are not supporting them in their investments or on their donor journey, not getting involved in discussions about their values and how they're going to live their values, they're firing their advisors. So there's a real drive taking place. And now we're starting to also see that lead into the older generation, so the boomers. The second is, I'll give you an example. So 73% of the younger generation in the UK say they want more opportunities to tackle social issues through impact investing, so there's a real shift to impact investing. Research at Morgan Stanley shows that 84% of millennials cite investing with a focus on ESG impact as their central goal. And again, that's their whole values alignment. Where for example values alignment is where most sustainability minded investors start. So it's coming from the clients. But on the other side, there are issues coming. But one more thing about clients is that we did internet interviews of 503 wealthy people a few years ago, and we asked them, are you receiving support from your advisers on your philanthropic work? And the answer was so so. You can tell how scientific I am. And then we asked them, could they rate across all the different types of advisory category? So legal, private banks, etc, etc. The average rating was 5.9, out of 10. Which is absolutely wretched, really terrible. And then the third question was did they want more? And the answer was definitely yes. So for supporting a donor journey, there's a definite desire on the part of wealthy people. And this just wasn't younger generation, this was all generations. On the other side, from the wealth management perspective, there's a whole issue now around consumer duty now that FCA just brought in and also Method 2 that the Eu has brought in around sustainability. And so there's a compliance issue. So not only is it being driven by clients, but also by compliance. And so if you're going to do these compliance things, you have to be able to have conversations with your clients about their values, their motivations, their ambitions, and within that, set priorities and then come up with a portfolio of products to invest in that helps them to live their values. If you can't have those conversations, then there's real issue. So we talk about suitability conversations beyond the normal discussions around suitability, so compliance plus clients, that's a lot of modern drive to bring these changes.
Brandon 9:50
Sort of building on that point then, Justin what are the market trends most prominently impacting the role of the advisor, whether it be in supporting clients on their donor journey, or addressing suitability issues related to their clients values, what are the market trends, most prominently impacting the role of the advisor?
Justin 10:13
Just picking up on John's point here, I think that the challenge has been, and still remains this issue of translating client aspirations into investments when we talk particularly about impact investments, investments that meet those aspirations. And I think when John talks about the performance, the so so performance, it's because I think there's a sense of clients somewhat being underwhelmed between a gap between their aspirations, and what is being offered to them by advisors in terms of investment opportunities. And quite often those investment opportunities still remain to be quite generic, quite bland, for example, perhaps a client's wishes to be invested into impact investment funds might be interpreted as a publicly listed ESG fund investing in large, multinational corporates. And that's a fundamental mismatch between the aspirations of the client and the solutions that have been offered to those clients. So I think that's a key problem, which is only really solved by better education of professional advisors, better networks, where professional advisors are able to be connected to more bespoke and more impactful investment opportunities that then can serve to speak more closely to the needs of underlying clients. And I think that's really where we as Innovest come in, because our primary role as a business is to work with impact investment fund managers. So we currently advise 11 Impact Fund managers with an AUM of $1.7 billion. And we call it impact AUM, because that money is deployed into deeply impactful investments. So those kinds of relationships basically mean that we are working with very authentic and genuine fund managers that are investing assets into underlying companies that are delivering a clear impact story to the market. And it's those type of managers with that intentionality, with clear values embedded into the management team of those fund managers, that the clients that John talks about are desperate to connect with, and that we can start to offer that connective tissue between supply and demand. And as a result of that, we are increasingly having conversations with substantial private wealth or private asset owner structures, such as specialized foundations and charitable trusts and family offices that have set up significant mandates for impact investing, and are looking to deploy that capital into managers that meet those ideals.
Brandon 13:35
John, what do you think about that?
John 13:38
I agree with what Justin is saying, I think there's some real issues. You mentioned that there's a need for better education. We run specialised training programs for advisors and our specialty isn't in the investment product, our specialty is teaching advisors how to have those conversations with their clients about their values and their motivations, ambitions, etc. And it's slowly changing where their comfort levels seem to be growing a bit, but there's still a long way to go. The other thing is to keep in mind that those conversations are complex. So they're not always easy, and you have to go into them well prepared. And so if you're having those conversations, you have to manage that conversation in a way that does a lot of what Justin is saying, but also keeping in mind what your portfolio products are and how they mesh together and stuff and then following up as Justin was saying and having the products there, which is really important. So better education is something that we focus in on at Philanthropy Impact. Don't let the words Philanthropy Impact fool you, we work across a spectrum of capital. So we work from philanthropy, to social investment to impact investing. And the other thing that's really important in all this, I think, is language. Words are used in so many different ways by people, whether it's clients, or whether it's the investment managers, etc, etc. And I think there's still a lot of confusion about some of the differences between ESG and impact investing and some of the complications, especially around impact. How do you measure impact? It's not going to be an overnight measurement. So I think there's some real issues around all that.
Brandon 15:29
And sort of shifting gears but sticking there on that point, John. We have to hear a lot about the next generation, the big transfer of wealth that's happening or due to happen shortly. The new generation of philanthropists that are coming through, are they creating a need for a new kind of wealth management?
John 15:52
Definitely, no doubt about that at all. We work with groups of millennials, Gen Z, and women of wealth around this whole thing. And it's really important for them to do impact investing, but also for many of them to do philanthropy or to do the two together. Can I read you a quote?
Brandon 16:14
Of course, yeah.
John 16:15
Okay, this is from a young woman millennial. "So as a next gen woman of wealth seeking to engage in values aligned, impact investing, and philanthropy, the role of my advisors is absolutely essential to enable me to achieve my economic and social goals." Etc, it just keeps going on like that. "My aim now is to use my personal wealth as a force for good, and to have systemic change in key areas or sectors that are really important to me." So this person focuses a lot on the environment, which is a theme that you guys have, as well. So that reflects a lot of what a lot of these young people are doing. And if we keep in mind, women of wealth, right now in the US, they control 50% of all liquid assets. And it's estimated within two generations that will be 70%. Their whole approach to their advisors is really quite different from the more traditional approach to advisors. So they have a strong interest in social entrepreneurial stuff, a lot of what Justin was talking about, their personal goals and values are really important. They're most likely to switch advisors if the advisors do not help them with their whole approach. So the stuff that Justin's doing is really important work around that. And the work we're doing around training advisors, and making them more aware about this, I think is really key and essential. The other thing is transparency and clarity. So as a professional advisor, it's really important for me to be able to articulate what my values are or what my company's values are, and not just to read the values that are written down, but to actually live those. And again, reinforcing a lot of work that Guernsey Finance is doing around that whole thing. It's really quite impressive what's happening. So Gen Z is those things as well, but it's also the use of technology. And a big part of this is not about using technology to communicate. A big part of it is relationship building. So technology is important, but I noticed that there's a bank, I just saw a headline that the detail is starting to use Metaverse as part of their way of communicating. And I think in a few years people will be using quantum computers as that. So there's some real big changes in for Gen Z. I mean, for me, slide rules were just a normal thing, right? You probably don't even know what a slide rule is. But for Gen Z, it's new. The technology and the Metaverse and a whole bunch of other stuff, it's really quite different, advisors really have to catch up on that and understand that change is taking place.
Brandon 19:07
Interesting, fascinating. Justin, John sort of mentioned in his previous point there a bit about measurement. And obviously it's crucial to in many ways how things play out and how impact is achieved in many ways and benchmarked, but how important do you think it is to achieving and measuring the impact process? That process might include impact strategy development, measurement and management, of course, but also due diligence and eventually at the end impact verification?
Justin 19:40
Yeah, I mean impact measurement is kind of critical to all of this. If we think about why there is this aspiration to deploy funding whether it be purely philanthropic, or repayable on behalf of a family or a principal, it's because they want to see change in the world. They have a vision, and they have values, and they want to basically see a positive impact on people or planet. That's the driver of all of this. And, you know, there may be factors around what's influencing them to do that in terms of family values, or legacy or support for the community in which they came from, multiple background reasons, but ultimately, that money has been deployed to achieve a certain set of objectives. And as a result, if you are unable to actually measure meaningfully on an evidence basis whether that intended change has happened, then all of this is pretty pointless. So I think for us in our work, measuring impact is critical to everything. And that process of measuring impact is not just gathering data at a point in time qnd assuming that that data is going to tell you everything you need to know, it is about a process that's put in place, upfront, that basically is set out in an impact strategy that really sets out what you're trying to achieve. So for example, fund managers that we're working with, it would be at the start of building a new fund proposition an impact fund proposition. It's sitting down with the team and it's saying, well what change do you want to see in the world? And how will investment achieve that change? Whether it be poverty alleviation, or financial inclusion, or safe and affordable housing or better quality education? And then what is the strategy that we need to develop to see that change, and setting out that strategy in terms of, we have a thesis of what impact will be as a result of deploying this capital, we then have a theory of change, which is a fancy phrase to basically say, what does the expected future positive impact look like, setting out a vision for success. And then we support the development of an impact measurement framework, which is really the operational system by which you determine KPIs and metrics. And those metrics are very specific attributes that you then say, well, it could be litres of water, or tonnes of co2, or it could be around number of loans provided or number of houses built. So those data points then become the practical system by which you then are able to track and measure impact over time. Then once you've got those data points, you then need to work with the underlying grantees or underlying investees, if it's an impact vehicle, to actually work with them to gather this data, and to gather that data meaningfully, accurately, regularly. And then when that data comes in, and it may be a mixture of qualitative and quantitative data is to then analyze that data and to determine whether that data indeed is saying what you wanted it to say, what you claimed to the market, or what you claim to the funder is indeed actually occurring. So I think impact measurement is critical. And impact measurement is just not a point in time, but it's an entire system that needs to be put in place to be sufficiently robust to generate the evidence, which then you can use to really go back to a funder or a donor, and say, here, look, that change that I claimed that we're going to make is actually happening. Or indeed, because life gets in the way sometimes, that actually there's a whole bunch of really interesting things that have happened that we never knew were going to happen. But we've got this data, now we can use that data to inform how we iterate or enhance our delivery model to make it more impactful. So yeah, that's the kind of sense of the importance of impact.
Brandon 24:56
And John, what are the differences across the spectrum of capital issues with regards to ESG screens and ESG managed investments, and impact related investments?
John 25:06
How many hours do we have? I'm going to keep this really simple. Training, we go through it in great detail because it's really important to understand this. And I think it reinforces what Justin's been saying. We knew everything from traditional return, to trying to maximize your financial return to avoiding harm. So exclusion of certain investments, which reflects ESG-related risks, and impact generating, which is much more focused on actually bringing change. And so there's a whole range of different approaches along that spectrum. We use in the training and we also make available to advisors as part of a tool that they can use, this spectrum of capital investment return continuum. Can I just give an example?
Brandon 25:06
Of course, yeah.
John 26:06
These are sort of simple questions. But you can adopt the spectrum in a way in your conversation. So this is a very simplistic review of this, but it's much more complex. So if it's around climate, for example, which is a theme this week. So for philanthropy or social investment, I might state climate change as an urgent priority for me, I don't need my capital returned to me, but create enough impact. So that is a sense of some of the conversations that we might have, if it's around impact investing, I want to contribute to addressing climate change, even if it means taking more risk or reduced return, not necessarily having just return, but that's always a possibility. If it's around responsible investment, I want to behave responsibly and efforts around traditional. I'm aware of the potential negative impact on the environment, but do not choose to mitigate it through my investments. So you can get into conversations with your clients that are parallel to that, but it's more complex than that, I've really simplified it to make the point here that you can use the spectrum of capital as a way of supporting those conversations. There's other tools that we use, for example, one that's been designed by Oxford Risks around fall behavioral approaches and stuff. So some really interesting behavioral tools out there to help clients set their priorities within sometimes the context of SDGs. Because, of course, SDGs are being used more and more by people to conceptualise their philanthropy and to a certain extent they're investing.
Brandon 27:47
And Justin, given that analysis by John of this spectrum, there is all the way from traditional modes of philanthropy all the way to the impact investment, but also just non-impact investment, I suppose, on the further side of that spectrum. What are the actual different methods of measuring impacts?
Justin 28:10
Yeah, just on that last point with what John responded to maybe just a little bit more from my side on that and then I'll give you some examples. But I think it's frustrating how this lack of understanding the market continues in terms of calculating ESG and impact. Because I think, from where we sit and the work we do, it's crystal clear that ESG is risk management. It's basically factoring in environmental, social and governance risks into how they affect your business operations. Whereas impact investing is investing intentionally into companies whose core business model is addressing a societal challenge, whether that be climate, the broader environmental or social impact. And I think for us, that's very clear, but the market still continues, unfortunately, to conflate which is not helpful. But yeah, coming back to impact measurement, I think this is a really important point that it really matters, what you measure. And I think historically, whether it be philanthropic funding, or impact investment, the easiest thing to do is basically measure what we call outputs. And they're basically the immediate effects of any organisation's activities. And they're typically numerical outputs. So it could be number of training courses given, number of houses built, number of loans made, and they look great because they stand off on a page and you can rapidly rack up lots of numbers. And those numbers can look visually attractive. But what we always say is it's telling you the what, but not the so what. And I'll give you a really good example. Financial inclusion is probably the largest impact investment thematic globally, there's billions invested into financial inclusion around the world. And a lot of the claims around financial inclusion are that you're basically banking the unbanked. And as a result of that, you're contributing to enhancing the wellbeing of those populations that didn't have financial access previously, and contributing to poverty alleviation and better incomes and increase family wellbeing. That's great. It's a very bold statement. And if you then drill into that, from an impact measurement perspective, you can get a lot of output data, so you could get all of this great information around how many clients have you provided loans or savings or insurance to this year? What was the average loan size you provided? You can probably generate a bit of data if you really push around, what was the average job created by that small business you financed or a farmer you financed? What was the average increase in income or business revenue as a result of providing them with financial services. But all of those numbers don't actually get to the heart of the question of did access to financial services have a positive impact on the lives of those individuals and contribute to poverty alleviation, etc, etc. And the only way that you're actually going to get that level of detail is to go beyond outputs into what we call outcomes, outcome measurement, which is basically the medium term changes that are achieved as a result of those loans or those homes built or training provided. And then ultimately, impact measurement, which is basically the long term changes that come about as a result of the accumulation of both outputs and outcomes. And what I mean by that is saying, let's take that smallholder farmer who was provided with a loan and increased his or her revenue, let's say by 50%, every year. What did that smallholder farmer do? Did he basically go down the pub and spend it on beer? Or did he actually take that 50% back to his home or her home, and then spend that on increased household consumption for positive activities. So imagine buying a malarial bed net, or paying for school fees where previously they hadn't been able to pay for school fees, or paying for grandmother's medicine, or buying an air conditioner, or a solar home system so they could read or work at night, rather than using a paraffin lamp, which is limited light and very unhealthy in terms of indoor air pollution. And it's only when you start to get to that level of granularity, that disaggregated data, that qualitative data, rather than just quantitative data, that you're actually able to generate evidence that then can go right back up to the start of your whole process that you set out in your impact strategy about what your theory of change was, that you're only ever going to be able to prove to your funders that the change you wanted to see and the change that you proposed to the funder has actually occurred. So yeah, I think just giving that sense of output outcome and impact measurement. And really, if you're going to produce clear evidence based data that your intervention has worked, you can't do that on purely output data, you've got to get some outcome and ultimately impact measurement data.
John 34:01
I think there's a spectrum of difficulty around this, the outputs are relatively easy to measure, outcomes are a little more difficult, impact way more difficult. And I don't think we see enough effort and resources being put into analysis of impact, because you're right as qualitative data, there's issues around causal relationships and whether it's correlation. But it's much more difficult. I think it's really important that we've made ways to start to do this, but it's not going to be cheap.
Justin 34:36
Yeah and John, just sort of coming back on that I think you've hit the nail on the head because this whole space is ripe for disruption. Because if you talk to a Social Development Practitioner, they will say the only way to evidence impact is to deploy a cadre of enumerators who with clipboards go around and they do baseline surveys, midterm evaluations, endterm evaluations, and have that ability to track data over time at scale across thousands of households, and you need a statistically valid sample size. And that's the only way to do it. And then you'll have academics who will come in and say, yeah well that's great but that's not gold standard, because gold standard is a randomized control trial, where we've got to have basically a group where they are receiving the service, the intervention, and a group that actually are statistically the same, who aren't receiving it. And that's the only way you're going to be able to prove whether your intervention is actually making a difference versus the overall market background. And I think the problem with with those types of interventions are they are hugely costly, hugely time consuming. And you can imagine in a COVID context, over the last couple of years impossible to do because of movement restrictions. And when I say ripe for disruption, I think where we are at with our work and our clients is trying to bring climate, environmental and social development rigor to the table, and then combine that with technology that allows large scale surveying to happen of grantees or portfolio companies, and then underlying beneficiaries. So clients, customers, employees, households, using technology, which is statistically robust, and is sufficiently considered as enough to provide that evidence base to prove causality and to prove impact. And it's somehow a sort of middle way between just generating lots of output level data, which is meaningless, and having this sort of academically rigorous gold standard, which costs hundreds of thousands of dollars to do properly. And that's what we're trying to do is right size, a solution that is cost effective. And is time effective for the market. And a good example of that is we just carried out about three months ago, a survey of a microfinance institution in East Africa, where we surveyed 1200 clients in 10 business days via WhatsApp. And were able to basically demonstrate causality between the lending activities of the microfinance institution and improved wellbeing at the household level of the customers of that microfinance institution as a result of financing,
John 37:49
You use the word causality, but that was most likely correlation. If you're following what you said about the social scientists and their approach around random trials, etc.
Justin 38:01
Yes exactly.
John 38:02
So yeah, it just shows how difficult this whole area is going to be. I think there's another aspect to this. You're right about the cost. There was a charity that I saw a few years ago that wanted to show their impact, and they spent £50,000 just to show their impact. Two problems with that- one the costs. The second problem is that they didn't use it internally to improve. And thirdly, they didn't use an external aid to demonstrate their value. And I think that we have to look at data management and business intelligence and evaluation from both an internal perspective, how can we improve the product that we have so we avoid greenwashing, etc? A nd externally, how do we demonstrate that the products actually have some outcomes and potential impact?
Brandon 38:54
I think this is a very interesting space and it's ever changing. And you've both kind of touched on the technological developments, it almost seems exponential where this could go. I wonder, Justin, where do you think it's going to kind of land in the next five to 10 years?
Justin 39:10
Yeah, I think all of these issues speak to the points around concerns around greenwashing or impact washing or SDG washing. Basically, claims that are being made of various stripes to funders, that are then unsubstantiated or even if the intent was there, that actually from a technical perspective, and this speaks to the measurement piece, the implementing partner whether it be a charity or social enterprise or a fund manager or company does not have the tools and the capability to gather sufficient data to back up their claims. And then this is what we call impact risk. And that is a gap between what you've claimed to the market and actually what you can then prove. And this impact risk is basically material now, particularly for somebody who puts their head above the parapet with these claims. And that is leading to significant reputational risk where people will not put money into that entity again, they'll tell everybody they know not to put money into that entity. And in some cases, particularly in the impact world, that is leading to the risk of litigation, and the risk of as sustainable finance legislation comes in, it also risks legislative action in terms of fines for misselling. So, yeah, I think it's super important. From a technology point of view, we're definitely seeing that that's the way that as the requirement for more rigor in terms of non-financial reporting, is becoming more and more pressing, then entities need to find scalable, robust, yet cost-effective solutions to gather that evidence. And as you say, John, they're never going to afford that full ability to demonstrate causality but to basically be able to demonstrate sufficient enough evidence that this program is making a difference is where they need to get to. And yeah, I think technology solutions are key to that. And what we've done in Innovest is really over the last couple of years, recognise that that is a market gap. And we've built an impact measurement technology that combines with our advisory expertise in the space to then offer clients the ability to measure at scale through a cost effective solution.
John 42:00
And we support that, but we come at it from the perspective of being prepared and to be able to manage the complexity of those conversations, because the clients have different levels of sophistication and needs around this. So some are just happy to hear that there's possibility this is going to be doing good for climate, etc. or dealing with equity issues. And others are more sophisticated. And you'll see probably the millennials and Gen Z becoming more and more sophisticated in what they're expecting. So if I just have to understand where the clients are coming from, and not to overly complex the conversation with them, but also to meet the needs that they're at. So it's like the Boy Scout Motto: be prepared.
Brandon 42:48
And Justin, you touched on it there in terms of measurements. But we have heard a lot in the last couple of years about greenwashing. And I think in many ways, it really is a real issue, particularly in financial services. Do you think measurement is the key to overcoming greenwashing?
Justin 43:11
I think it's part of the armory. I think measurement provides evidence and evidence can be used to then demonstrate whether claims have indeed materialised. So I think it's a key practical tool for a manager. But, you know, I think greenwashing starts well before that. And I think greenwashing starts right at the point of designing an intervention, and that that intervention needs to be designed with sufficient humility, not a market-driven based approach, and one that is fact-based, so that overclaiming and overstating is not something that happens from the get go. Because if that is the way things go, you're, always going to be basically fighting an uphill battle to basically prove what you've stated or overclaimed Because it's impossible to actually achieve that. So a lot of our work in the impact strategy side of things, is to work with managers to, on one hand, encourage them to be brave and to be bold and to really commit to put capital to work to make a fundamental difference in addressing some of these large global challenges, so there's no point in them not being brave and being bold. But to do so on the basis of a well researched, academically rigorous impact investment thesis that can stand up to scrutiny. And is fact-based when it goes to market. And then what we also encourage fund managers to do is to basically not just embed their impact strategy and targets and metrics and KPIs into their fund marketing documentation, but to actually be bold again, and be transparent and embed it into their fund issuance documentation as well. So in effect when an investor comes in, an LP comes in and sees the investment memorandum, and signs LPAs, that actually they are seeing that impact commitment embedded legally into those fund documents. So again, it just keeps the fund managers feet to the fire at a very early stage and then motivates and incentivises those managers to actually then actualise that impact over the lifespan of the fund. I think another couple of things really important, that again just mitigates greenwashing, is around moving beyond that marketing phase, and taking that impact strategy and embedding it into your investment processes. So, using your impact strategy to create an impact due diligence system. So when you have a pipeline of portfolio companies that you're looking at that not only are you screening them for commercial and financial considerations, but you're providing equal weighting on impact considerations. And ultimately, a decision by the Investment Committee or decision by the board, ultimately, to invest in a deal is a weighted decision that is weighted on a combination of financial and impact considerations, because if somehow, the deal is only concluded because of purely commercial considerations, then that impact risk issue then starts to materialise again. And then finally, I think another thing just to consider how you keep the managers feet to the fire and keep them honest, is around, how do you embed impact into their own financial incentives? So, annual remuneration, for example, should annual remuneration have an impact element to it? That you've got to achieve certain impact targets, as well as financial targets to achieve your full compensation for that year. And likewise, in a standard private equity fund, where you've got the carried interest, which is really where the managers make their money, where they basically take a 20% fee of any profit made above the benchmark return to investors. And then the managers historically have always been incentivized to hit that carry, because of the profit they get from it. What we're seeing in the market, and what we've been actively involved in with a number of our fund management clients is designing this concept of impact carry, where a certain percentage of that carried interest, it could be 50%, it could be 70%, maybe 25%, is linked not to financial considerations, but it's linked to the achievement of impact targets. And again, it just really focuses attention of the entire fund management team on hitting those impact objectives. So all of these things across the lifecycle of the fund, marketing, fund issuance, impact due diligence, impact incentives, impact measurement, and management. All of these are designed to minimise the risk of greenwashing. And that's what we fully encourage in every manager that's coming to market wanting to launch a branded impact or sustainability fund.
John 48:53
Can I add two things to that conversation, because what's being said is correct. But there's two things that I think are really important around what Justin is saying. One is, if you're going to achieve that you have to learn how to talk to your clients about this stuff. And many professional advisors really have a problem doing that, whether they see it as necessary, or whether they're shy about it, or whatever, whether they feel they have the skills. The second is that Justin was talking about the importance of impact targets for advisors. So I think there's two aspects. There's the organisational aspect, and there's the individual aspect. And again, I go back to the use of language. Impact targets, how are you going to measure impact targets as an advisor as part of the compensation system where you might be able to measure outcomes, but it's really difficult to measure the impact targets, I think we have to be really careful about the language that we use, because there's so much confusion out there and I don't think we should be adding to that.
Brandon 49:51
Well, I wanted to pick up on that first point, actually, because you mentioned there about how to broach that conversation between the advisor or the manager and the client How would you, or more broadly perhaps, how does Philanthropy Impact advise Wealth Management advisors and their firms to prepare for conversations with clients about their values and their motivations?
John 50:12
Well, we've come at it from a number of different perspectives. I mean, the training programs that we have are really essential to these things. So one about supporting clients on your donor journey, I mentioned data earlier about clients wanting that. And the other is about having suitability discussions around their values and motivations, etc. I sound like a broken record when I say that, but it is true that it's really important to keep emphasising that. So we look at it from a number of perspectives. So when we work with firms, we talk about it in terms of organisational policy. So as Justin has mentioned, KPIs should be built in around having these conversations and supporting clients on different aspects of it. And so for the organisation, it's really important that management has to buy into it. There's always been the individual wealth managers, etc, who do this. But if the organisation has not bought into it, then I think there's some real issues. So we spend a lot of time talking to companies about how they can start to build this into day to day kinds of activities, which is really important. And KPIs are one part of that. In some organizations, what they do is they select champions. So if you have a few hundred or more advisors, then one way is to train everyone. But the other is to select champions who can reinforce what's happening and support their colleagues around this whole thing. So there's different approaches. The second way of doing it is around the training and the training, we make sure that people understand the compliance issues, because that's really important, we make sure they understand what clients are wanting, and the changes that are taking place with different generations. And so FCA consumer duty method too is really important, the whole thing around next gen etc. And so picking up on the market trends and training, as I said, is really key to this. And so prepare, learn, put into practice, have policies in place, and really starting to understand that language is really important. And so a lot of the miscommunication can be dealt with, and people start to use common language or understand if someone's using different words, and different ways and stuff to kind of pick up on that, so communication.
Brandon 52:58
And finally, Justin, just to circle back to the opener to the conversation today. And in many respects, I suppose the crux of what we've been discussing throughout this podcast, do you think that these big issues will continue to be of importance? Or do you think they will become less pressing in the face of current inflationary rates and obviously the cost of living crisis? Are these headwinds going to slow these processes down? Where do you see things going in the short term?
Justin 53:31
I think things are here to stay. I think just reflecting on some of the comments from this weeks, Sustainable Finance Week in Guernsey, the AUM that is now flowing into sustainable and impact investments is larger than it's ever been. And I think global headwinds, uncertainty in the market, doesn't seem to be having so far a significant dampening effect on that. And I think that's largely driven by a broad global movement towards a recognition of the climate crisis and the need to massively increase financial flows to address what is potentially an existential issue for all of us. And then I think broader issues around social justice, that have come out of COVID, and come out of a recognition of fundamental inequality in the world. And I think that's translating into fund managers recognising that their clients want to have a positive impact through their investments and obviously, John's work with and survey work with Gen Z is also proving that out in terms of families of significant wealth. So I think this is set to stay. Even with the challenging global context, I think this journey is moving at pace and therefore is one that continues to need long term support and attention from professional advisors and industry specialists such as ourselves.
John 55:26
I think we're moving in the right direction. There's going to be more and more shift from transactional approaches, to advice, to actually a relationship, especially as technology gets so good that transactions will just be in seconds and will be high quality. So relationships are going to be important if you want to keep your clients. I think there's room to grow. There's some stats that we came across around philanthropy from HMRC self assessment data. The top 1% of earners averaged income of £271,000 their average monthly donation is £48. So there's a hell of a lot of room to grow in terms of from a philanthropy perspective from wealthy people. From an advisor perspective and picking up on this, as I mentioned earlier, there's organisational issues that have to be addressed. And I think that the culture and behavior of the advisory marketplace is shifting and slowly getting there. But there's still a ways to go and there's work that Justin's doing the work that we're doing, they'll complement each other and reinforce a lot of that. And financial return is still important, especially in these difficult times. But at the same time social issues around gender equity environment, racial equity and stuff are really top of the agenda as well. But good luck in measuring impact.
Brandon 57:02
Well, thank you both for your time today. Thank you, John. Thank you, Justin.
Justin 57:08
Thank you.
John 57:08
Thank you for having us.
Brandon 57:10
I particularly enjoyed hearing your thoughts about what is driving professional investment advisors to get involved in and have those conversations with clients about their values, and notably about how they can solve some of the global issues of our time in many respects. I was also fascinated to learn more about the the methods and ways of measuring there from Justin and how vital measurement is to properly achieving impact. And thanks also to you for listening. If you enjoyed this discussion, we have a backlog of interviews and panel discussions on the We Are Guernsey podcast channel, you can check them out by searching for We Are Guernsey on your preferred podcast platform. To find out more about Guernsey and its specialist financial services sector, head over to our website at WEAREGUERNSEY.COM. We also have links to John and Justin's respective social media in our show notes along with their firm's Philanthropy Impact and Innovest advisory. Check these out to hear more from them. Until then it's goodbye from Guernsey.
Transcribed by https://otter.ai