How Impact Investing Could Move Family Offices Beyond ESG Screened Portfolios

Impact investing is no longer a novel concept in the family office space. This is evident in the Global Impact Investing Network’s (GIIN) most recent Impact Investor Survey results, whose respondents climbed from just twenty-four in 2010 to nearly three hundred in 2020. The survey also indicates that the impact investing market is now worth a considerable US$715 billion.

It is no secret that family offices and ultra-high net worth individual (UHNWI) investors hold tremendous power in this sector due to their unique agility. This enables them to ethically leverage privately-owned capital to invest towards transformation and address our time’s significant social and environmental challenges while also generating verifiable outcomes and profits. Yet, each family office is different, as is their approach to responsible, ESG and impact investing and where their portfolios lie on this spectrum as a result.

With this in mind, today the team at Simple released the 2022 Sustainable & Impact Investing Review. The review surveys the impact investing landscape from the family office perspective, reviewing families’ unique approaches through various case studies. These examples include direct investments, continued involvement of family offices in innovative projects, and family offices stepping in to act as stewards of a fund’s initial impact investment. Below is a brief synopsis of the review’s key highlights.

The impact revolution

Impact investing is the most recent development in the evolution of investors aligning their ethical standards with their portfolios. Over the years, investors have moved from purely socially responsible and sustainable investing to incorporate environmental, social, and governance (ESG) data into investment analysis. This approach includes ethical considerations and widens family office outlooks beyond purely financial matters.

What sets it apart from other approaches on the social responsibility investment (SRI) spectrum is that its core tenets revolve around financial and non-financial returns in the form of societal good. Where other approaches are designed to avoid harmful investments, impact investing aims to solve problems while generating returns for investors.

In the family office space, impact investing enables families to align a more significant portion of their portfolio with ethical and philanthropic priorities, generating both returns and positive outcomes. It can also be an effective tool in uniting generations where a defined set of values defines and drives objectives and the family’s legacy, making the world a better place for future generations.

This is where impact investing fits in on the SRI spectrum:

The Impact Investment Landscape

Simple’s Impact Investment review examines “The field of play” in the impact investing ecosystem. Many stakeholders may collaborate to maximize impact and returns to produce the best possible outcomes.

Family offices can potentially align interests within impact investing networks, advisors, data & rating agencies, impact funds, institutional investors, banks, foundations, accelerators, and media. The review gives a detailed overview of the key players in each of these segments. It examines real-world examples of how their contributions and collaborative efforts make a difference in family office impact investment and society at large.

Family office impact investing in four easy steps

Impact investing affords family offices opportunities to align a more significant portion of their profit-oriented investment portfolio with the family’s ethical and philanthropic priorities. Findings from Simple’s Impact Review research indicate that there are many approaches to impact investing within family offices and that there is no single correct approach.

That said, when getting started in impact investing, family offices may consider the following four steps:

1. Explore

Like most other investment practices in family offices, the impact investment exploration stage often begins with internal conversations between family members. In other cases, impact investing may be explored when evaluating the family office’s investment portfolio along with Sustainable Development Goals or ESG criteria. Alternatively, the activities of significant funds in the impact space may spark interest in how the family office may also participate.

Regardless of how the subject arises, the review finds it vital for family offices to connect with peers, investment networks and advisors early in the exploration process. This not only helps to assuage skepticism but also to build knowledge. When assessing risk tolerance, identifying the impact area of focus and profit potential, weighing all three factors against current portfolios with the help of knowledgeable advisors and networks can provide the information necessary to ease the transition into impact investing and strategizing.

2. Strategize

Once the decision has been taken to move into impact investing, identifying investment opportunities and strategizing their execution is often more familiar terrain for family offices with significant expertise.

Investment opportunities may be identified in multiple ways. These may include joining impact investing networks, attending impact investment gatherings, connecting with investment or fund managers or advisors who focus on this area or simply reaching out to existing contacts in startup communities.

Reviewing impact reports generated by firms seeking investment and engaging advisors or other stakeholders with expertise in impact investing due diligence for specific investment opportunities provides added support beyond early-stage network engagement.

The review also indicates that direct equity investments often produce the most significant impact. Therefore, determining success criteria and deciding on the terms and conditions of potential investments is vital at this stage.

3. Execute

Impact investment execution is similar to traditional investing, albeit with different expectations and parameters. Again, the review shows that there are several approaches family offices may take depending on their objectives.

Family offices may follow one of three main routes in this regard. The first is to provide capital to established firms to direct new outcomes through specific projects. The second is to invest in firms established to generate positive social or environmental impact. And thirdly, impact investors may push for change through post-investment actions such as voting and engagement.

Execution strategies often involve different combinations of stakeholders and the desired degree of direct family office involvement and the resources available.

4. Evaluate

The lack of sustainability data in impact startups due to their early stage of development can make evaluating impact investment success is challenging. Therefore, family offices must establish key success criteria as evaluation metrics in strategic discussions before the execution.

The Impact Management Project lays out five dimensions of impact that should be considered: What is the desired outcome? Who is involved in the outcome? How much: To what extent is the result felt by stakeholders? Contribution: To what extent does investor contribution influence the outcome? Risk: What is the likelihood that impact will be different from what is anticipated? Considering these factors at every stage of the impact evaluation is vital.

Never has it been more apparent that the economy requires a shift towards sustainability in all activities. Impact investment has the unique ability to answer this call, bringing tangible change while driving profits. Family offices and UHNWI investors are critical cornerstones with the power to shape the future for the better.