Investment Advisor Perspectives on How To Bring Conservation Into Traditional Portfolios

This article is the second of a two-part series focusing on the challenges of and opportunities for incorporating conservation finance into traditional investment portfolios. Part 1 discussed the major barriers; for Part 2, CFN spoke to investment advisors about strategies for overcoming these hurdles.

Interest in Impact Is Growing

Anecdotally, while most traditional investment advisors are unaware of conservation finance investment opportunities, interest in impact is growing for some investors and advisors. A vast inter-generational transfer of wealth — nearly $70 trillion — is expected to happen in the United States over the next 25 years, according to a 2018 report by Cerulli Associates, and younger generations are known to focus more on impact with their investments. According to a 2018 Fidelity Charitable survey, more than 70% of affluent millennials (ages 18-37) and Generation-Xers (ages 38-53) have invested for impact.

Nicole Davis is a partner and senior wealth manager at 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 many of Veris’ clients are baby boomers who have always cared deeply about social and environmental issues but only recently inherited money, so working with Veris is their first leap into impact investing. Other clients have become motivated to invest with impact due to their increased awareness of the climate crisis and political inaction on it.

Further, Davis has observed that attendance at socially responsible investing panels within mainstream finance conferences has multiplied about tenfold in the last 10 years. “The tide is turning,” Davis said, and the crowd is often younger, more racially diverse and more gender-balanced than the typical investment advisor field.

This momentum opens opportunities for greater incorporation of conservation finance into traditional investment portfolios across a variety of scales, from small retail to large institutional.

Boosting Traditional Advisors’ Interest and Breaking Into Conservation 

Advisors’ client base is changing, and becoming more interested in conservation and climate-relevant topics. Brad Harrison is a managing director at Tiedemann Advisors, where he co-leads its impact investing work managing $2.5 billion in assets — about 15% of Tiedemann’s total under management. He said that to provide suitable options to clients, advisors should educate themselves on impact finance. The investment strategy of owning real assets — such as timberland and agricultural land — for a long period of time “probably has the greatest ability to sequester carbon and mitigate climate change,” he said.

Harrison emphasized the effects of generational wealth transfer on the education process. “For the most part, clients are going to be educated [on impact finance] on their own, and if firms aren’t responding to the demand, they’re going to lose clients,” he said.

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. He suggested it would be helpful if research were conducted that demonstrated that introducing conservation finance could enhance client retention.

Conferences, webinars and written resources are all useful sources for advisors to become more educated about conservation finance. Weatherley-White said he became aware of the field slowly, starting off by researching sustainably managed timber for an early impact investing client, and eventually diving in about a decade ago at his first Conservation Investor Conference. The annual conference, hosted by Credit Suisse and produced in partnership with CFN, Seale and Associates, Cornell University, The Lyme Timber Company and Equilibrium Capital, aims to educate the mainstream investing community on conservation finance.

“That’s really where my mind got blown open on this front,” Weatherley-White said.

Once more advisors become educated, they can use their position to bring more credibility to the conversation around conservation finance. “After all, anyone with a thorough understanding of climate science will see the need for the critical flow of capital toward these issues,” Weatherley-White said.

Advisors’ client base is changing, and becoming more interested in conservation and climate-relevant topics.

Generating market-rate returns is of course a significant factor in attracting traditional investment advisors’ interest to conservation finance opportunities. Davis noted that her firm truly believes it is possible to meet both a client’s impact and financial goals at the portfolio level. “You can have impact without giving up performance,” she said.

Boosting the visibility of conservation investments that have generated market-rate returns could draw greater attention from traditional advisors. 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.

“Over the last decade, the number of funds realizing economic value from incorporating more innovative conservation strategies like mitigation banking, water rights, carbon credits and easements has increased,” she said.

Ease of investment is another key factor for increasing participation in conservation investments. “For traditional advisors to encourage incorporation of conservation into clients’ portfolios, they would need something that’s easy for them to invest in,” Davis said.

Martinez, who previously led the global consulting practice at Cambridge Associates, suggested that investors looking for impact should seek out advisors who are well-educated and experienced in long-term sustainable growth.

To facilitate better incorporation of impact investment opportunities into client’s portfolios, organizations like the Global Impact Investing Network have been partnering with investment firms like Tiedemann Advisors, Harrison noted.

There are also several organizations that help clients transition from traditional firms to impact firms. One organization doing so is Confluence Philanthropy, which has released a “Finding Your Way to the Right Impact Investing Advisor” resource guide.

As an alternative, Harrison pointed out that there are several impact-focused networks that investors could connect with without using an investment advisory firm at all. These include CREO Syndicate, Toniic and CFN.

How Advisors Can Help Clients Increase Conservation Impact

To help focus a client looking to invest with conservation or other impact, advisors should identify the specific mission of their investment. “The client needs to think about what their goals are and what kind of impact they’re looking for,” Martinez said.

Finding this mission alignment will ensure advisors and clients do not hit stumbling blocks or confusion by remaining too broad.

According to Harrison, “The more and more you can align the theory of change to the portfolio, you’ll get a more intentional and purposeful result.” Once the mission is established, advisors can work with their clients to analyze each asset class, one by one, to determine whether their existing investments fit or whether they should be reconsidered.

“The idea of trying to force conservation finance into a limited time frame is somewhat antithetical to the asset itself."

Martinez said that some advisors are evaluating the efficacy of offering longer-term or evergreen structures to investors rather than limiting themselves to 10-year terms that have historically been the standard for most private equity funds. “Assets like naturally regenerating timberland don’t lend themselves to 10-year lock-up periods like traditional private equity funds,” she said. These funds could be structured to include liquidity mechanisms, or methods of extracting one’s assets from an investment if a client needs to exit at some point.

“The idea of trying to force conservation finance into a limited time frame is somewhat antithetical to the asset itself,” Martinez said.

Institutional investors — those who trade securities in sufficient amounts to qualify for special discounts — also have some additional strategies at their disposal.

Advisors can help institutional investors write missions into their investment policies. “The idea in doing so is to incorporate a focus on impact into a long-lived institutional pool of assets that will outlast an individual client’s position as a representative on a board or other role,” Martinez said. 

In addition, a major factor that can influence the uptake of conservation investments is advisors demonstrating that they have “skin in the game,” Martinez said. By investing their own money into the options they suggest to their clients, advisors can signal confidence in the opportunity. According to Martinez, investors want to see an alignment of interests with their advisors.

Looking Forward: Moving Conservation Finance Into the Mainstream

The experts we interviewed recommended a variety of overarching strategies to accelerate the incorporation of conservation into traditional portfolios.

Harrison summarized: “If conservation finance products were structured more like traditional investment products, traditional investors would have an easier time understanding them and including them in a traditional asset allocation framework.” Reducing the complexity of conservation finance deals would make them less likely to be overlooked. “The more that people focus on [these deals] and simplify them, the more cash will be invested into them,” he said.

In addition, if conservation finance opportunities could be implemented through the public market rather than primarily through private means, there would be “no shortage of capital that could be put to work,” Davis said, especially in the public bond market. This would open up a much wider audience of investors, since most are generally familiar with bond structures and their risk profiles (such as pension funds).

Further, in the public market, shareholders can use their voices to flag areas for improvement or issue shareholder resolutions, so there could be greater advocacy for impact. “If more public market solutions were available, conservation investment opportunities would become mainstream so much faster,” Davis said.

Ultimately, market-based solutions to conservation challenges — like wetland mitigation banking, carbon trading or biodiversity credits — are an emerging market for most investors and advisors. Employing analysts and investment professionals at investment firms who understand the field will ensure these opportunities are capitalized on, Harrison said.

As a final idea, Weatherley-White suggested that a “fund of funds,” or highly diversified asset class, centered on a conservation finance theme (such as sustainable oceans) could be packaged and brought to a major traditional investment bank. Such strategies “would eliminate the need for advisors to gain specific domain expertise,” he said. “They would just need to recognize that these types of causes are important and worthy of investment.”

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