Trends and Opportunities
Shifting preferences among investor segments: Demographic trends reflect a shift in aggregate preferences among retail investors. Millennials and women – two investor segments that are highly coveted by financial institutions – have emerged as key target groups that are driving impact investing. A survey of individual investors by Morgan Stanley found that Millennial investors are nearly twice as likely to invest in companies or funds that target specific social or environmental outcomes. The same survey also found that female investors are nearly twice as likely as male investors to consider both the rate of financial return and positive impact when making an investment.
Wealth transfer dynamics: According to survey data, we are in the midst of an unprecedented generational wealth transfer among different investor cohorts. Baby boomers are expected to transfer upwards of $30 trillion over the next three decades to Millennials. As noted earlier, these groups are displaying different preferences than their parents and grandparents around investment strategies. There are some data that suggests that this is true for high net worth Millennials – a survey by US Trust of high net worth investors found nearly two-thirds of Millennials own or employ impacting investing strategies.
Portfolio diversification and uncorrelated assets: Impact investment is an approach to intentionally integrating social or environmental value creation as an objective, and to incorporate environmental, social and governance (ESG) and impact data to inform investment decisions. These factors have been shown to positively influence investment performance for investors and companies. Impact investments have also performed competitively in global markets, and based on data within private equity funds, have displayed strong performance.  There is some evidence that these investments are also uncorrelated to broader market trends, given that they have strong local and/or thematic focus that differ from conventional asset allocation strategies and investments.
Impact investing is a natural fit for credit unions, whose principles of social responsibility, financial inclusion, and community commitment have formed their foundation and are reflected in their missions, strategies, and product offerings. Moreover, credit unions have played a significant role in the development of socially responsible investment (SRI) and socially responsible mutual funds in Canada. Similar to the market for SRI, credit unions have an opportunity to play a leadership role in the development of the retail impact investment market in ways that other financial institutions do not. The section below elaborates on why credit unions should consider playing a role in retail impact investment.
Mission: As co-operative financial institutions, credit unions are governed by seven internationally recognized co-operative principles, including “concern for community.” Credit unions give expression to this principle by working to ensure the social and environmental well-being of their members alongside their financial well-being.
Alignment with existing activity: Credit unions work to positively impact the communities they serve by addressing issues that affect their members’ well-being. For example, many credit unions provide microloans to underserved entrepreneurs or individuals as well as loans to businesses – including co-operatives and non-profits – that aim to help solve social and environmental problems. Credit unions themselves project a 60% increase in the value of their impact investing by 2018. Impact investment is an expansion and enhancement of credit unions’ existing role in developing the market for socially responsible investment. By providing their members the opportunity to invest in retail impact investing products, credit unions will continue to ensure that they remain at the forefront of values-based investing in Canada.
Opportunity for growth: Research conducted by the Global Alliance for Banking on Values suggests that financial institutions that base their decisions for the greater good, individuals and society, as opposed to the maximization of profits, are outperforming their competitors in areas such as return on assets, growth in loans and deposits, and capital strength. By making social finance a core part of their business model (which would include offering impact-driven products for individual members), credit unions will have an advantage over competitors. In particular, retail impact investment products can:
- Increase market share: Some members that place money in credit unions do so intentionally, so that their capital will be redistributed to meeting community needs. This desire to invest directly in their community indicates that some members are strongly invested in the positive growth and development of their local communities. By offering retail impact investment products, credit unions can increase the market share by attracting new members and increasing business with existing members.
- Enhance brand awareness and reputation: In general, credit unions that engage in sustainable and corporate social responsibility benefit from strengthened brand recognition and value.
- Increase member loyalty: Academic research suggests that values-oriented retail investors are more loyal to their mutual fund brokers and to their banks than conventional retail investors. Values-oriented investors invest a greater percentage of their total portfolio with a socially responsible bank than with competing conventional banks.
To conclude, the opportunity that retail impact investing products present to credit unions can be central to their strategy in at least two ways:
First, if the credit union strategy includes an appeal to values, a concrete demonstration of those values is necessary. Impact investing products are fit for this task. Second, if the credit union strategy includes an appeal to Millennials, the credit union will likely have to have at least one impactful product, and preferably, an entire menu of impact products. Once again, impact investing products are fit for this task.
Despite the opportunity that retail impact investing presents to credit unions, the majority of credit union activity in this space is not available to their members, as impact investment at the individual level has been limited. The reason for this is that credit unions face a number of challenges to developing retail impact products, including:
- Lack of knowledge within the financial sector: The social finance sector is not covered by mainstream media, nor is it prominent within traditional financial education. Within the financial sector, social finance is often used interchangeably – and incorrectly – with terms such as corporate social responsibility, SRI, and microfinance. There is also evidence that a lack of advisor awareness is a bottleneck to mobilizing and employing social finance at a retail investor level.
- Lack of investor awareness of social finance options: While there is now more interest in socially responsible investments, many retail investors are unaware of the product opportunities available around impact investing. Compared to conventional – and even SRI products – impact investing options tend to be limited and often not visible to retail investors.
- High transaction costs: Developing a new retail impact investment product requires viable investment opportunities in funds, organizations and projects. Costs for finding impact investment opportunities and conducting the due diligence are often high. Moreover, across the credit union sector, building the information technology infrastructure and coordinating across credit unions can put up barriers to the creation of system-wide products.
- Restricted distribution channels: The lack of a distribution channels for retail impact products is an issue that applies to product issuers rather than individual credit unions (as the former would have the potential work with credit unions to distribute the products). However, this is a broader structural issue that has prevented impact investment products from achieving economies of scale.
- Regulatory barriers: There is a perception that there are significant legal and regulatory barriers to developing retail impact investment products, and particularly to enabling products to be qualified investments. While there are some additional considerations for retail impact investment products, many of the barriers tend to be similar to what is required for conventional product development.
- Capital allocation issues: For some products, such as those that would be funded directly from the credit union’s balance sheet, there may be an issue with the credit union’s ability to commit sufficient capital to the product. As with other products, capital ratio requirements should be reviewed regularly with senior management and the Board to ensure that they are sufficient.
The remaining chapters in this guidebook will identify strategies that individual credit unions and the sector more broadly can use to transcend these barriers. In particular, the guidebook provides a detailed roadmap that is reinforced by practical advice for credit unions interested in developing their own retail impact investment products. While values, strategic goals and culture vary across credit unions, the guidebook seeks to identify a broad set of lessons and recommendations that can be adapted to the unique context of each credit union.
 Morgan Stanley. ( 2015). Sustainable Signals: The Individual Investor Perspective. Retrieved from: https://www.morganstanley.com/sustainableinvesting/pdf/Sustainable_Signals.pdf.
 Accenture, (2012).The “Greater” Wealth Transfer: Capitalizing on the Intergenerational Shift in Wealth.
 US Trust. (2015). Insights on Wealth and Worth Survey.
 Cambridge Associates and the Global Impact Investing Network. (2015). Introducing the Impact Investing Benchmark.
 See Credit Suisse (2011) Microfinance – an attractive portfolio diversifier. However, data are not yet conclusive, as a recent debate has noted: http://ssir.org/up_for_debate/a_coming_of_age_for_impact_investing/tim_macready
 For example, Vancity was the pioneer in ethical investing with the creation of the Ethical Growth Fund in 1986, and credit unions continue to be among the largest sellers of SRI mutual funds in Canada.
 Canadian Credit Union Association. (2013). Social Finance Systems Brief. Retrieved from: http://www.cucentral.ca/Publications1/System%20Brief%20-%20Social%20finance%20and%20credit%20unions.pdf.
 Purpose Capital. (2014). State of the Nation: Impact Investing in Canada.
 The Global Alliance on Banking on Values, ( 2012). Strong, Straightforward and Sustainable Banking. Retrieved from: http://www.gabv.org/wp-content/uploads/Full-Report-GABV-v9d.pdf.
 Strandberg, C. (2010). Filine Credit Union Social Responsibility: A Sustainability Road Map Retrieved from: https://filene.org/assets/pdf-reports/207_Strandberg_Sustainability_Road_Map.pdf.
 Bauer, R. and Smeets, P. (2015). Social Identification and Investment Decisions. Available at: http://dx.doi.org/10.2139/ssrn.2140856. Also see: Hebb, T. Diouf, D. and Hadji, E. (2014). Exploring Factors that Influence Social Retail Investors’ Decisions. Journal of Business Ethics. 134(1) 45-67.
 CCUA Social Finance systems brief (2013). Retrieved from: http://www.cucentral.ca/Publications1/System%20Brief%20-%20Social%20finance%20and%20credit%20unions.pdf.
 Purpose Capital and Venture Deli. (2012). Redefining Return: Social Finance Awareness and Opportunities in the Canadian Financial Sector.
 Purpose Capital. (2013). Survey of Canadian Credit Unions. Retrieved from: http://purposecap.com/portfolio/social-finance-awareness-financial-sector/
 The Money for Good Survey (2010) finds that 27% of individuals surveyed learn about investment opportunities from their advisors. Advisors do not often recommend impact investing opportunities, even though there may be a demand for them. Incentives for advisors is an area that requires further exploration
 This perception may be attributed to the notion that retail impact investing products are primarily offered by non-traditional issuers and secondly, that financial securities regulations are primarily designed for large and sophisticated issuers, whereas currently, many issuers of retail impact investment products tend to be significantly smaller and may not have the time and resources that are required to offer regulated investment products.
 Additional considerations may include assigning risk to impact investment opportunities, many of which are not publicly listed, and as such, have different disclosure requirements.