Matching impact-seeking investors with the right investments in the creative economy is an art as well as a science.
I had the great privilege to advise investors from a total portfolio perspective for nearly thirty years. I’ve learned to appreciate the uniqueness of the combinations of factors that each investor brings to the table: their return aspirations, their ability to withstand different kinds of risk and, increasingly, their interest in using their investment portfolio to address the society-level issue areas that they care about. This latter concept is commonly referred to as ‘impact investing’ these days, though it really amounts to some combination of ‘caring about things’ and simply ‘more thoughtful investing’.
Impact investors have concerns about a range of systemically challenging issues. Significant dollars are already invested with an intention to address climate change, gender inequality, racial injustice, water shortages, discarded plastics in the environment and many more. Incorporating these bigger-picture thematic concepts into the investment approaches of any given organisation or family’s financial aspirations makes each case a unique puzzle.
Although many best practices for investing are commonly accepted, and therefore standardised to some degree, the human element of investing remains a critical component of the portfolio construction and ongoing investment management processes. Investors appreciate the opportunity to share their own thinking and to receive guidance from their human advisers. They appreciate having custom-constructed portfolios that reflect their own hopes and fears and intentionality in the world. As long as these human elements remain a key part of the investment process, investing will continue to be at least as much art as it is science.
That is exactly the point, in my mind, of investors and their advisers doing the work to understand and nurture investing in the creative economy. The human element will forever require the kinds of problem-solving and perspective-adjusting skills that only artists and other creative thinkers can bring to the conversation.
Investing with a total portfolio context involves taking a multi-asset class approach, distributing risk and investment across the spectrum of available asset types. These include public and privately traded equities and fixed income, real estate, other real assets and more. Risk-reducing diversification is sought among large companies and small, among governmental and private issuers of securities, and among geographies.
Adding impact as a third dimension on top of return expectations and risk tolerance is what gives impact investors a more complete picture of what they invest in, and why
Impact investors are also cognisant of the value of diversity by race and gender, and people from indigenous communities, and apply this thinking when it comes to sourcing investment opportunities and managers of investment strategies. McKinsey & Company has demonstrated that companies with diverse leadership outperform those without, so this value is more than social. Creative economy investors go yet another step and seek to add diversity of perspectives from artists and creative thinkers, recognising the benefits of such an approach in identifying great investment opportunities, and/or reducing investment risk and/or making more impactful investments.
Impact investing takes what is already a complex spectrum of purely investment theory-based approaches and infuses it with a complex spectrum of its own: the challenge of integrating impact aspirations into the overall investment process. Impact investors identify the systemic risks most important to them and evaluate their portfolios, including each investment therein, with appropriate scrutiny of the impact their investments make in the world.
Some investors include impact thinking because it will help them to align their values with their investments. Others focus more on the risks or opportunities that such additional analysis may bring to be table. These two approaches are not in conflict with each other. Adding impact as a third dimension on top of return expectations and risk tolerance is what gives impact investors a more complete picture of what they invest in, and why.
The portfolio construction process starts with specifying appropriate investment policies and guidelines, preferably in a document called an investment policy statement (IPS). This step is followed by sourcing well-researched and appropriate investment opportunities to populate the multi-asset class portfolio that will be responsive to the investor’s financial and impact aspirations.
Following implementation of the approved investments, the investor must monitor and evaluate the performance of their investments individually, as well as at the portfolio level, for financial returns relative to their benchmarks and for impact performance relative to appropriate impact metrics. Reaching agreement on how these metrics will be targeted and benchmarked is essential for fair performance evaluation. Creative economy impact performance metrics can be codified in the IPS and shared with potential investment managers or portfolio companies in advance of the investment being made.
While it’s possible to argue over definitions, some industries are understood to be a part of the creative economy, including media and entertainment, music, digital media and video games, architecture, cuisine, fine arts and fashion. Investable opportunities in these creative industries can be in companies large and small. A broader portfolio approach to investing that also infuses a respect for creativity would add investments in companies that harness creativity and innovation in their methods, as well as companies squarely in creative industries.
In the public markets (the more liquid asset classes), a creativity-loving impact investor may include companies across industries that value cognitive diversity and creative thinking in their workforces, and that promote innovation by budgeting for research and development. These traits would be in addition to what impact investors typically look for in public companies: responsiveness to the community through shareholder and other stakeholder engagement, total workforce diversity, not only in the C-suite, ethical supply chain management and other good governance factors.
Private markets offer the opportunity for more narrowly targeted investments in the creative industries. Specialist venture capital, private equity and private lending vehicles support artists, designers and other creative entrepreneurs by providing growth capital to businesses delivering creative products and experiences, providing tools and platforms that enable creative work, and more. Focused private real estate vehicles provide live/work spaces to artists, light manufacturing space to creative industry businesses, and community space such as galleries and theatres.
The impact investment solutions are already there for those creativity-loving investors willing to put in a little extra work to seek them out. If you’re not sure where to find them, there are investment advisers and consultants who can help you. The best ones don’t just do the standardised parts of their jobs. They would love for their clients to say, ‘Hey, my adviser is not just a person who pulled a portfolio off the shelf and put my investment dollars into it. She worked with me to find the best solutions for me. In a way, she’s an artist in her own right.’
