The growth of the impact investment market in recent years creates an opportunity for families looking for a way to express their values through their investments. The Impact Investing Institute, a U.K.-based nonprofit that does research, advocacy and training on impact investing, recently published Family Offices: A roadmap to impact, a guide for families who are exploring this area.
The guide includes details on today’s impact investing market, advice on how to articulate family values and advocate internally for impact, tips for developing an impact investing strategy and investment policy statement, and guidance on building a team, including working with external advisers. It also offers a checklist for families to help them get started.
Sarah Teacher, executive director of the institute, discusses the evolution of the impact investing field and how families can get started:
What is impact investing, and how does it fit into the broader investment picture?
To be an impact investor means to intend a positive, measurable social and environmental return on an investment. Impact investing offers risk adjusted market rate return, so it plays a role in mainstream portfolios, but it also delivers positive benefits for people and the planet.
Impact investing globally is sized by the Global Impact Investing Network at $1.164 trillion. In comparison, though, the global investment market is around $98 trillion, so impact investing is roughly 2% of that market. So it’s not giant — but it’s growing in response to social and environmental realities like climate change, biodiversity loss, and social inequality.
Does impact investing bring lower returns than traditional investments?
People have historically thought that impact investing comes at the cost of the return itself, so the yield you would get off your investments is less because of the impact playing a role. But now the market has developed to a state where that is simply not true. The majority of impact investments that people make are delivering within asset class as competitive of a return as you would find in the same asset strategy that isn’t delivering impact. If you’re investing in low risk, but low yields, you can find impact alternatives that meet the same criteria. If you’re investing in high-risk, high-return PE, you can invest in high-risk, high-return impact PE opportunities that are yielding the same results.
In every part of what you’re doing, impact investing can now play a role. This is an evolution of financial practice, and families are so well-placed to be part of this.
Why is impact investing a good fit for families?
It’s an extraordinary tool, not only for investment but for values engagement. It’s similar to the pleasure and agency people get over thoughtful, effective giving. They can now apply this to their investment strategies. And that’s a really exciting place for families to be. We see an opportunity for families to marry their values with their investment approach.
I spent the early stages of my career working with philanthropists, and I’m still somewhat involved in that sector as the chair of the European Board of Rockefeller Philanthropy Advisors. Many wealthy families had very clear and articulated values and wanted to see those values manifest in their legacy. Back in the 2000s, that was mostly expressed through a philanthropic impulse or estate management. But because of the developments in the impact investing markets over the last 20 years, now there is this amazing opportunity for family offices to take that expression of their values and to pull it across their mainstream investment approach.
No other institutional investor, apart from charitable endowments, has as much latitude as families do to combine impact in their investments and to positively change the world while securing their own futures.
What types of opportunities are available?
In the guide we talk about a spectrum of engagement. The market has matured to the extent that you don’t need to be an expert — you don’t need to make direct investments in impact opportunities. You can absolutely work with well-established mainstream managers on an impact investing strategy in the same way that you would purchase other funds from managers. So you don’t need to take direct stakes, but sometimes that’s part of the fun.
For example, let’s take the example of a business which makes jams and chutneys out of waste fruit and vegetable products and employs people who have been furthest from the world of work. If you are an adult trying to bring your child into feeling an agency over their wealth, you can open the fridge and say, ‘We invested in the business that made this jam. Now let’s go and meet the woman who founded it, and the people who had been excluded from the workplace who now have roles as a result of our investment.’ That can be a really powerful part of impact investing for families.
But these opportunities stretch all the way through to mainstream capital market strategies. If you’re a family and are cultivating a next-gen member to step into a leadership role, they need to know how to hold managers to account, while the investment professionals within the family office need to understand what impact investing is and how they need to retool things like their investment policy statement to deliver it.
What objections do you hear when you discuss impact investing?
Most objections to impact investing are anchored in an outdated view of the market. People will say it’s low return, the product is not there, it’s only in private markets. On all three counts, that may have been true 15 years ago, but it is absolutely not true now. In any given asset class, you can find a competitive impact product.
This is a new approach — you have to take the lead on educating and informing people. You have to understand that this is evolution, not revolution. We talk about opportunity, the investment opportunities that are surfaced by an impact approach. And we also encourage ownership of the strategies by mainstream financial professionals. I think as soon as the CIO starts to kind of pop the hood on some of these opportunities, they realize they’re not so different. It does require new capabilities and new thinking. But it’s an extension and development of what they’ve done rather than this kind of crazy hippie thing that someone’s bringing to the family.
And then obviously, there are the interpersonal, complex dynamics. It’s all well and good to say, ‘How amazing to come together as a family, and detail out your values and come together in common cause.’ Well, at best, sometimes those conversations are incredibly awkward. So good facilitation with people who understand about governance is also a really important part of it.
How specific should the family’s impact investing goals be?
If you wanted to build a 100% climate mitigation portfolio, delivering market rate return and impact, you 100% could. That level of strategy is absolutely doable. But there can be dangers in over specifying the outcomes, because obviously, you limit the pool of product.
To take one example: One family office we spoke to decided to be impact agnostic in their direct investment. They said, ‘We care that it delivers positive impacts, but we don’t care if that’s an educational impact or a renewable energy impact or a biodiversity impact. We’re looking for great founders.’
Families should ask themselves, What would make sense for us to express our values across our investment approach? What do we care about? For some families, that might be an issue area. For others, it might be a place.
Ultimately this is going to go in an investment policy statement and will be used to instruct managers. Starting with a broader statement means you’ll be brought more opportunities. And then over time, you can refine it.
Does impact investing risk cutting down on philanthropy?
Absolutely not. It’s not an either/or‚ it’s a both/and. I think families see that you’re generating a different type of impact. As a really great foundation leader here in the UK said, not every problem is grant-shaped. Impact investing is just an additional tool that families can use to express their values.
