Family offices which act as responsible stewards of the wealth of individuals, their families and their heirs, are increasingly exploring impact investing as a viable strategy.
One fact we find interesting is that after wealth is generated by one generation of a family, an estimated 60%lose that wealth by the end of the second generation and 90% by the end of the third, as outlined in Beating the Midas Curse by Perry Cochell and Rodney Zeeb in 2005. Many multi-generational family offices are now exploring whether impact investing is a way to unite families around values and positive legacies, thereby more closely involving family members in responsible long-term investing.
Impact investing enables families to be explicit about their shared values and to reflect them in their investment and wealth management decisions. In addition, an impact investing strategy aligned with family values can help to engage a younger generation in the leadership and management of a family office. According to a 2013 Financial Times survey, family offices that are already active in impact investing cite inter-generational wealth transfer, contribution to sustainable economy and community, family values, risk management and succession planning, as top motivations for engaging in impact investing.
A good fit
There are three main reasons why family offices may be well-suited to be impact investors. For a start, family offices have greater discretion and independence in investment decisions. This may not be the case for other asset owners subject to policy regulation, such as pension funds and insurance companies, or that have mandated trusts which limit decision-making, such as large foundations. In other words, family offices can be flexible in considering investments of varied sizes, geographies and asset classes.
Secondly, family offices are guided not only by financial considerations but also qualitative factors, such as their standing in the community and inter-generational legacy. This can — and often does — make the discussion about investing for multiple bottom lines easier to have with family offices than with other asset owners. The third reason is that family offices can play a role in ecosystem-building by sharing knowledge, serving as role models, and possibly even financing organisations dedicated to sector-building.
Multi-step plan
World Economic Forum has created a five-step process for family offices who are interested in impact investing to begin their investment journey, which is briefly outlined below and more details can be found in our Family Offices Primer.
1\. Define a clear vision for impact investing. The family must align its values, its desired future legacy and impact and financial goals to what it wants to achieve through the family office. Assessing the internal context is important to understand the constraints as well as opportunities for its impact investing strategy.
2\. Determine how to engage with impact investing. It is ambitious for a family office to begin by re-allocating a significant portion of assets to impact investing; a more gradual and iterative process is often preferred after examining internal capabilities, considering available resources, knowledge and expertise.
3\. Develop investment guidelines. Formalised investment guidelines allow the family office to align family members’ interests and values and help to ensure a smooth execution of the strategy. If an investment policy statement already exists, the family office can update it with impact goals and evaluation criteria.
4\. Execute the investment strategy. Deploy capital based upon the investment guidelines and impact portfolio construction model. The report provides more detailed insights on different portfolio construction models as well as investment sourcing, due diligence and monitoring.
5\. Evaluate the portfolio on a regular basis and adjust strategy. While executing the investment strategy, family offices should review periodically the successes and setbacks and refine the investment guidelines accordingly. Clear and defined impact and portfolio goals upfront will facilitate the evaluation process, whether it is through third-party assessments or periodic internal review. Based on the results of the evaluation, the family office can refine its investment strategy with updated impact and portfolio goals.
Unlocking potential
Impact investing is a nascent and growing sector — it is a combination of new impactful investments entering the market and investors uncovering new opportunities and ways to include impact into their investments.
It is really hard to say the exact level of growth because the data that we have (the best sources are from the JPMorgan/Global Impact Investing Network annual survey and the OECD impact investing research) naturally — like almost all research — has a time-lag.
The most recent figures suggest an estimated $50 billion of assets under management and ImpactBase estimates there are over 300 impact investing funds. The 2013 Financial Times survey also found that family offices allocated 17% of their assets under management to impact investments, with a broad spectrum of exposure from 1% to 100% for some single family offices in the United States, United Kingdom and Switzerland. Interestingly, according to a 2013 CFA institute study, 66% of financial advisors said that they were unaware of impact investing.
Investments
Impact investing strategies target financial returns which can range from capital preservation to market-competitive, and focus on a spectrum of social and environmental outcomes depending on sector, theory of change, implementation strategy and targeted beneficiaries. While private equity and debt investments provide a more direct connection between an investor’s capital and impact creation, public equity and debt strategies can also help tackle global sustainability challenges.
Strategies can be applied across asset classes and risk-adjusted return targets in diverse and numerable ways. Common impact investment themes include: community development, small business finance, health and wellness, education, microfinance and financial inclusion, sustainable consumer products and fair trade, natural resources and conservation, renewable energy and climate change, and sustainable agriculture and development.
In recent years, the investment opportunity set and number of intermediaries have increased, allowing for the creation of diversified impact portfolios with investments across asset classes that satisfy investors’ risk and return requirements, in addition to generating positive social and environmental impact.
For those family offices that decide to engage meaningfully with impact investing as the sector matures, the opportunities to create multi-dimensional wealth (financial, societal impact and long-term legacy) will be worthwhile.
