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Investment Advisors Weigh In on Barriers to Conservation in Portfolios

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In Brief

This two-part article series explores the challenges of and opportunities for incorporating conservation finance into traditional investment portfolios.

In Part 1, various current and former investment advisors with deep knowledge of impact finance discuss the challenges of integrating conservation investments into traditional investment portfolios.

Lack of awareness about conservation, challenges from the asset class, incompatible investment sizes and lack of incentives pose challenges, according to interviewees.

Interest in impact investment has grown in recent years, but a substantial conservation finance opportunity exists outside of the impact space: boosting the conservation impact within traditional investment portfolios.

This two-part article series explores the challenges of and opportunities for incorporating conservation finance into traditional investment portfolios. Conservation finance is considered a niche investment area by most traditional investors and investment advisors, but if enabling conditions were put in place for this type of investing to become more mainstream, there could be major uptake, thus making a significant conservation impact. Here, we define traditional investors and investment advisors as those who seek to appreciate their and their client’s capital by means not explicitly associated with positive social or environmental impact.

In Part 1, various current and former investment advisors with deep knowledge of impact finance discuss the challenges of integrating conservation investments into traditional investment portfolios.

Lack of Awareness

Investment advisors are financial professionals who make recommendations to clients regarding the management of their assets. They hold significant influence in directing the flow of investors’ capital, but this opportunity to introduce clients to conservation investments remains untapped for many. After all, of the $85 trillion invested worldwide, only $52 billion, or less than one percent, annually goes toward conservation, according to a 2017 report by PricewaterhouseCoopers and a 2014 report by Credit Suisse, World Wildlife Fund, and McKinsey & Company.

Matthew Weatherley-White is a co-founder, managing director and impact investing lead at The Caprock Group, an investment management firm that advises over $4 billion in client assets. According to Weatherley-White, mainstream investment advisors, or advisors who are working to boost their client’s wealth without a focus on impact, are “totally unaware” of conservation opportunities.

To his recollection, he has “never had a conversation with an advisor not already involved in the impact investing field who knew what the term ‘conservation finance’ meant, and others who did recognize the term thought that it meant funding nature, rather than financing it,” Weatherley-White said. In other words, they were confusing philanthropy for finance.

A 2019 Barron’s article noted that advisors lag behind their clients in broaching the topic of impact investing. A Fidelity Charitable survey found that only 41% of advisors have talked with their clients about impact investing, while 60% of investors have already made an impact investment.

Building on this lack of awareness, according to Weatherley-White, there is also a misconception in society around the topic of conservation finance. He said that we have a cognitive bias against linking conservation practices with a positive financial return, which is no easy feat to overcome. Many advisors may overlook these investment opportunities because they are not able to envision the potential returns. Labeling opportunities with terms like “sustainability” or “social impact” could in some cases impede their uptake by mainstream advisors and investors due to such misperceptions, according to Weatherley-White.

Challenges From the Asset Class

Interviewees noted that conservation finance opportunities are generally available as private investments and therefore are illiquid, difficult or impossible to exit earlier than their target completion date. They also tend to require longer-term investment commitments than stocks and bonds that trade in the public markets.

Nicole Davis is a partner and senior wealth manager at impact wealth management firm Veris Wealth Partners, which manages over $1.3 billion of assets for high-net-worth individuals, families and family foundations who want to create positive change with their wealth. She said that private investments tend to remain “locked up” for 10 to 12 years. Thus, this illiquidity prevents a great uptake of conservation finance deals in portfolios.

Davis also noted that for many institutional and high-net-worth clients, private investments tend to make up a small portion of portfolios, typically between 10 to 15 percent. Institutional clients are organizations, such as commercial banks, pensions funds and insurance companies, that invest on behalf of their members. This private investment allocation is often diversified between hedge funds, venture capital and private equity, as well as by vintage year, or the year in which the first flow of investment capital is committed to the opportunity.

Even though conservation investments are generally categorized as private equity, it is also worth noting that sometimes they do not align well with standard asset classes such as fixed income, private equity, commodities or real estate. Lindsey Brace Martinez, founder and managing partner at StarPoint Advisors, LLC, works as a strategic partner to small- and mid-sized asset management firms and companies that want to scale long-term sustainable economic solutions in the capital markets. She noted that these investments “can be hard for investors to benchmark relative to other opportunities available in the market,” and therefore may be left out of consideration.

Moreover, “While there are a few experienced managers in conservation finance, the opportunity set is limited relative to other impact themes,” Davis said. This is due to the fact that the conservation finance field is relatively new. The lack of expertise among traditional investment advisors inhibits greater attention toward conservation investment opportunities. In addition, clients may be leery of selecting a fund started by a brand-new manager without a track record of success in impact investing.

“Nobody likes to invest in a first fund, but somebody needs to invest in first-time funds to have second-time funds. Catalytical capital from impact investors can play an important role for first-time funds,” Davis said.

Further, given that conservation investments are often new strategies and thus may appear risky, it can be hard to find investors willing to commit pools of capital toward them.

Incompatible Investment Sizes

Considering the structure of most private investments, it is often challenging to pair the relatively small transaction sizes normally associated with conservation investments with the large target fund sizes that many funds require.

According to Weatherley-White, large brokers and investment banks typically will not place new funds on platforms unless they are able to deploy $100 million or more, and many have a minimum fund size of $500 million. However, most conservation funds are seeking less than $150 million or so. As such, conservation finance opportunities do not receive as much mainstream exposure.

Approaching this conundrum from a different angle, there are also issues associated with the size of investments that individual investors can contribute toward conservation finance opportunities.

According to Weatherley-White, special purpose vehicles can be set up for individual investors who cannot deploy funds at the level that large brokers or investment banks can. However, they are not often used since “few advisors are willing to go through the hassle of establishing a structure to facilitate access for smaller investors,” Weatherley-White said. Special purpose vehicles allow aggregation of smaller investment sums from multiple sources, so they can be an option for entities, such as single families, who cannot meet the minimum investment requirement on their own.

Investors also run into roadblocks due to the fact that most conservation investments are in private equity and require certain minimums or accreditations to participate. As Davis pointed out, these opportunities are only available to institutional high-net-worth individuals, and are vastly different than what is available to the average person investing in a 401(k).

“For the general public, very few people are eligible to make conservation investments,” Davis said.

Lack of Incentive to Learn About Conservation Finance

“The average (non-impact focused) advisor is focused solely on a client’s financial goals, not their impact ones,” Davis said. “As a 100% impact firm, Veris Wealth Partners has developed a knowledge base around conservation finance and has clients that want to invest in conservation, but there are very few advisors who are well versed about conservation finance.”

Even those advisors who do care about impact do not have much of an incentive to branch out into new topic areas, according to Weatherley-White. Many already have committed clients so they are not pursuing new ones who may need to be drawn in by new topic areas. Further, there is also little incentive for advisors to seek new revenue through conservation investments since most advisors’ existing investments are generally already performing well.

Ultimately, Weatherley-White emphasized that unless people like himself who have become educated in the conservation investment space are willing to be proactive in engaging others, word will not spread easily. While many investors would like to discuss conservation finance with their advisors, few advisors are interested in broaching the subject because they are not well versed.

So, what can be done? Part 2 of this article series will outline various strategies to tackle these obstacles inhibiting greater traditional portfolio capital from flowing to conservation investments.

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