Investing in impact: a strategy for next generation family offices

The Deloitte Global Millennial Survey 2020 found that Millennials and Gen Zs, in general, will support companies that align with their values, putting people ahead of profits.  So what does this mean in the context of the family office, for whom next generation and succession planning is undoubtedly at the forefront of management’s minds?

As the younger generations take the reins of family offices; they demand investments with purpose, and look to create a tangible positive impact from their investments.  In this blog we explore some of the basic principles of impact investing and its potential returns, consider why the investment class is so popular in many family offices, some common pitfalls, and some thoughts on approaching this asset class if you are new to it.

There is nothing new about high net worth individuals engaging in philanthropic ventures or grants, whether driven by altruism, reputation management or virtue signalling.  However, this may have traditionally taken place outside of the family office itself, and are often funded on the asset side by investments with negative externalities (oil and gas, for example). Impact investing, unlike pure philanthropy, offers an option which delivers both financial return, as well as direct social or environmental impact.  This is an opportunity for the progressive millennial generation to direct their family’s capital towards investments which align with their values; whilst also having the opportunity to preserve their wealth.

So what exactly is impact investing? Imagine a scale where traditional market investing sits at one end; and philanthropy at the other. Impact investing sits somewhere in the middle between socially responsible investing, which features screening of ESG (Environmental, Social and Governance) risks in investment portfolios, and pure philanthropy. Impact investments are those made with the intention to generate positive, measurable social and environmental impact alongside a financial return.[1] Investing may take the form of direct investment into projects, companies or initiatives, or through products such as social bond funds and Sustainable Development Goal (SDG) impact funds. The key feature here is that impact is embedded into the core of the investment’s business model so that the more successful the business is, the more impact it creates.

But does the data show that these investments can actually boost the bottom line of a family office, and not just their legacy? An overwhelming majority of respondents in the 2020 Annual Impact Investor Survey reported meeting or exceeding their impact and financial expectations (99% and 88% respectively). Research has also shown that improving the impact of a portfolio does not always come at the cost of risk-adjusted returns[2]. However, often, multi-generational family offices are too conservative for the novel field of impact investing, or are tied into legacy structures set up without the flexibility of allowing this type of investment strategy. They may also hold back until there is substantial evidence of returns, with business model risk and management risk as their greatest concerns. 

It is important to recognise the challenges of impact investing – which are magnified by the fact that this remains early days for this type of asset. One of the key sources of uncertainty is over impact measurement itself. The subjectivity involved, the lack of reliable data and the lack of a formal measurement framework remains a barrier to attracting capital. Tools such as IRIS+, B Analytics and GIIRS aid impact measurement but gold standard measurement practices including randomised controlled trials can also be expensive, time-consuming and not ethically, operationally or financially feasible. Impact-washing (stemming from “green-washing”) is also a concern – using the word ‘impact’ in the name of the fund may help to attract capital, particularly as it becomes an increasingly trendy investing space, but it may just be a branding trick.

Impact investing is not just something to be left to future generations to think about.  It should be integrated into succession planning, and consideration given to directing family office capital towards purpose-led ventures offering both social and environmental, and financial returns. This is in anticipation of not only supporting the younger family members’ values, but also attracting new talent to run the family offices.

Family offices should, as with all asset classes, follow a measured and structured step-by-step approach when entering the impact investing universe:

1. Establish a clear vision of future legacy, aligned to the family’s values;
2. Evaluate the fit within the existing portfolio;
3. Formalise the investment policy to integrate impact goals and evaluation criteria;
4. Identify the investments and perform due diligence; and
5. Monitor the impact and evaluate the outcomes.

Family offices are in a unique position where they have tremendous pools of capital and flexibility over how they use it. As impact investing enters the mainstream mind-set, family offices are in a position to help to scale the sector and push sustainable and impact-driven investment strategies towards the top of the agenda. 

References:

[1] Global Impact Investing Network (GIIN), “What you need to know about impact investing” https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing.
[2] The One Initiative Impact Report https://www.oneinitiative.org/investorreport/