Impact & Value Based Investing: A Comprehensive Guide for HNWIs

October 2024 Article #8

As high-net-worth individuals (HNWIs) increasingly seek to align their financial goals with their personal values, Impact and Value-Based Investing have become crucial strategies in modern wealth management. Many investors are now looking to deploy their capital in ways that not only grow their wealth but also contribute to positive social and environmental change. While impact investing focuses on addressing societal challenges like sustainability and ethical business practices, value-based investing targets undervalued assets, offering an opportunity for strong financial returns and risk mitigation.

This article delves into how combining impact investing with traditional value-based investment strategies can create a balanced portfolio for HNWIs—one that aligns with personal values while mitigating the risks often associated with impact-driven investments. We’ll also explore how Pallas Wealth Management helps clients achieve this balance by integrating both approaches into tailored portfolios. Please note, this is not investment advice but an exploration of strategies to protect and grow wealth in today’s evolving financial landscape.

Why Impact Investing is Gaining Popularity Among HNWIs

Impact investing has seen tremendous growth among HNWIs as more investors seek to align their wealth with personal values, such as sustainability, social justice, and ethical business practices. Historically, wealth management primarily focused on maximizing financial returns, often with little regard for the broader societal impacts of those investments. However, today’s HNWIs increasingly want to ensure that their investments generate not only financial returns but also meaningful contributions to the world.

1. The Rise of Conscious Capitalism

The philosophy of conscious capitalism, which focuses on creating value for all stakeholders—including employees, customers, and the environment—has gained traction in recent years. This mindset aligns with impact investing, where financial growth is pursued alongside positive social outcomes. HNWIs are drawn to this approach because it allows them to build wealth while supporting causes like climate action, human rights, and ethical labor practices.

This trend reflects a broader understanding that financial success and social responsibility are not mutually exclusive. Through impact investing, HNWIs can channel their capital into sustainable development, social justice, and environmental stewardship, contributing to a better future while still growing their wealth.

2. A Generational Shift in Wealth Management

Much of the rise in impact investing has been driven by younger generations of investors, particularly millennials and Gen Z. These generations are inheriting significant wealth and are keenly focused on the global challenges facing society, such as climate change and inequality. Research shows that 72% of millennials believe their investment decisions can make a meaningful difference in tackling these issues.

This generational shift is prompting wealth management firms to incorporate environmental, social, and governance (ESG) criteria into their investment strategies to meet the evolving needs of these clients. Younger HNWIs often view financial performance and social impact as equally important, pushing the financial industry toward more socially conscious investment offerings.

3. The Push for Corporate Responsibility

The increasing demand for corporate accountability is another major driver of impact investing. HNWIs have greater visibility into how companies operate, including their environmental policies, labor practices, and governance structures. As a result, many investors are using their capital to support companies that prioritize sustainability and ethical business practices, while avoiding those that engage in harmful activities.

This shift has spurred the growth of shareholder activism, where investors use their influence to advocate for change within the companies they own shares in. By aligning investments with personal values, HNWIs can not only contribute to social and environmental improvements but also safeguard their wealth in an era where responsible corporate behavior is increasingly tied to long-term business success.

Combining Impact and Value-Based Investing: A Balanced Approach

While impact investing offers an opportunity for HNWIs to align their investments with personal values, it often comes with inherent risks, particularly related to the volatility and uncertain profitability of newer or more socially-driven companies. To manage this risk, many investors are turning to value-based investing, which focuses on identifying undervalued companies with strong fundamentals, often referred to as “legacy brands,” that provide stability and growth potential. By combining impact investing with value-based investing, HNWIs can build a balanced portfolio that aligns with their values while mitigating the risk of financial loss.

1. Understanding Value-Based Investing

Value-based investing is a strategy where investors seek out companies that are trading for less than their intrinsic value. This typically includes established “legacy” brands or companies with solid fundamentals that may have been overlooked by the market. These companies often have a strong market position, brand recognition, and stable cash flows, making them attractive long-term investments.

Legacy brands—such as companies in industries like consumer goods, healthcare, or infrastructure—are often undervalued due to temporary setbacks or market conditions. However, these companies tend to have a proven track record of weathering economic cycles and delivering consistent returns over time, making them a valuable addition to a portfolio that might otherwise be focused on more volatile, impact-driven investments.

2. Balancing Risk and Returns

Combining impact investing with value-based investing allows HNWIs to strike a balance between high-growth, socially-conscious investments and more stable, undervalued companies with strong potential for long-term gains. By integrating both strategies, investors can offset the risks associated with impact investing, which often focuses on newer, more innovative sectors like clean energy or sustainable agriculture that can be prone to volatility.

For instance, an investor may allocate a portion of their portfolio to companies leading in renewable energy or ethical supply chains—sectors that align with their values but may carry higher risks due to evolving market dynamics. At the same time, they may invest in undervalued legacy companies within more stable industries, such as healthcare or consumer goods, which can provide reliable cash flow and mitigate potential losses from impact-driven investments.

3. ESG Integration and Value Investing Synergies

Many undervalued legacy brands are starting to incorporate ESG principles into their operations, making them attractive to both value and impact investors. For example, large companies in industries like manufacturing or consumer products are increasingly focusing on reducing their carbon footprint, improving labor practices, and enhancing corporate governance. These changes not only improve the company’s public image but also strengthen its long-term viability, making it a strong candidate for value-based investors looking for stable growth.

By investing in legacy companies that are transitioning toward more sustainable business practices, HNWIs can benefit from both the financial security of value investing and the social impact of ESG integration. This approach allows investors to build a more diversified portfolio that reflects their personal values while reducing exposure to the inherent risks of impact-driven investments.

Tailoring Portfolios with Pallas Wealth Management

At Pallas Wealth Management, the focus is on creating customized investment strategies that blend impact and value-based investing to achieve both financial success and social responsibility. The firm works closely with HNWIs to understand their unique values and financial objectives, designing portfolios that are tailored to meet their specific needs.

1. Personalized Portfolio Design

Pallas Wealth Management begins by engaging with clients to understand their personal values and long-term goals. Whether a client prioritizes environmental sustainability, gender equality, or social justice, the firm builds a portfolio that aligns with those priorities. By combining impact investing with value-based strategies, clients can support the causes they care about while still achieving reliable financial growth.

• Positive Screening: Pallas Wealth Management uses positive screening to actively select companies that score highly on ESG criteria, focusing on industries like clean energy or ethical supply chains.

• Negative Screening: The firm also employs negative screening to exclude companies or sectors that do not align with the client’s values, such as those involved in fossil fuels or poor labor practices.

By balancing these strategies with value-based investments in legacy companies, Pallas Wealth Management ensures that clients’ portfolios are diversified, resilient, and reflective of their values.

2. Measuring Impact and Financial Performance

To help clients track the performance of both their financial returns and social impact, Pallas Wealth Management uses a comprehensive measurement and reporting system. This system evaluates both the financial and non-financial outcomes of each investment, allowing clients to see how their portfolios are performing in terms of both profitability and societal contribution.

Metrics such as carbon footprint reduction, employee diversity, and corporate governance are used to assess the impact of ESG investments, while traditional financial metrics track the performance of value-based investments. This approach gives HNWIs a clear view of how their wealth is being protected and grown in a way that aligns with their values.

Conclusion: The Future of Value-Based Wealth Management

Combining Impact Investing with Value-Based Investing offers HNWIs a powerful strategy for protecting and growing their wealth while aligning with personal values. By integrating undervalued legacy companies with strong ESG performance into their portfolios, HNWIs can achieve the financial stability of value-based investments while contributing to positive social and environmental outcomes.

As impact investing continues to gain popularity and more companies adopt sustainable business practices, this blended approach will likely shape the future of wealth management. Pallas Wealth Management is at the forefront of helping clients craft portfolios that balance these strategies, ensuring long-term financial success while making a meaningful difference in the world.

Disclaimer: This article is for informational purposes only and should not be considered as financial or investment advice. Please consult with a professional advisor for tailored investment strategies.