It is still a disjointed sector that is struggling to compete with traditional finance. What avenues are open to family offices in particular to make different choices, and where is the sector seeing the most momentum? This article covers some of that ground.
The dual realities of the pandemic and climate change have shone a light on impact-first investing. But the question is whether the category “will remain a small, disorganized, underleveraged niche or whether leaders will come together to fulfill the industry’s clear promise.” That was the quandary posed by pioneers of the industry over a decade ago, but how much of it holds true of the sector today?
A main sticking point has been convincing private investors entrenched in market-seeking returns to take some gains off the table in the cause of addressing social and environmental problems that are increasingly rattling the public consciousness.
Boston-based consultancy Bridgespan Group advises high net worth individuals and family offices to invest in the impact space as the market matures and presents more opportunities.
We spoke to partner Michael Etzel, who says clients are wanting to exert more influence across all the big investment categories, not just philanthropy. The firm has also seen an acceleration of family offices coming together to collaborate on larger investment projects. “It’s a striking change from three or four years ago when co-impact investing barely existed for family offices,” he said, talking to this publication about what opportunities make the most sense for HNWs and family offices.
“Our work is to help them find the tools available and to go a little bit faster,” he said.
Despite numerous surveys expressing interest, family offices invest around 9 per cent of their investment capital on impact projects, according to research from Campden, and financial return remains their top priority. At the same time research shows that over 80 per cent of wealthy families believe the wealthiest (themselves) should be tackling social issues and playing a bigger role in reducing inequality.
Impact-first investments are those specifically designed to tackle issues such as poverty, disease, inequality, social injustice, and environmental degradation, and must be able to demonstrate a positive environmental or social impact. This accountability is where the toughest critics of ESG investing insist on clarity between the two. Depending on whose figures you digest, the global market for impact investing is worth around $700 billion, according to The Global Impact Investing Network (GIIN)'s latest survey, and increased by more than 40 per cent in 2020.
How does Etzel’s team approach getting more families channeling investment into well-governed responsible enterprises? Where is the pushback?
“It depends on whether you are talking to the CIO or the principal as they tend to be very different conversations in a family office structure. For the CIO, a lot of talk is about incentive structures and how the office has been built. This is because what they have been asked to do historically is protect and grow the wealth of the family office.
The first pushback is: 'Wait a minute, is this going to slow down our goals? Is this going to challenge us and work against our incentives as an investment team?'” he says.
However, family offices are becoming more flexible in their approach to social impact, he says, with bolder ones opting to have an impact team over a philanthropy team in place.
“In those cases the barrier we tend to hear is usually just a mindset,” he said.
“They are aware they have accumulated wealth using two different pockets – a check book over here, which is how I’ve made my money and been a good steward of my wealth; and a check book over there for how I give back and contribute responsibly. But now you are telling me there is something in the middle. How do I do that?” Etzel explains.
Once wealth owners pass that first hurdle and move into the specifics, the next hurdle is, “‘Gosh that seems really hard’,” he says.
The group’s report Back To The Frontier: Investing That Puts Impact First, published earlier this year, highlights how the sector is becoming more mobilized, collaborative and standardized in terms of measurement and best practices, with ample case studies to suggest that getting started “is not as hard as you think.”
“For family and multi-family offices, the options have really grown quite a bit,” Etzel said.
For those wanting more exposure, one path is to completely outsource, either working with an outside advisor or an intermediary.
“That’s where we are seeing some of the multi-family offices and wealth management teams building rapid capacity, because they are getting the demand.”
Millennials in intergenerational family situations are also exploring the space. “We are starting to see a response from wealth managers saying we really need capacity here,” because the dynamics in families are changing, Etzel said.
As the major beneficiaries of an estimated $30 trillion the next few years, Millennials are statistically more likely to seek out responsible investment choices.
Organizations such as Jordan Park, spun out of Goldman Sachs a few years ago, are part of a new breed of manager building dedicated impact teams that are targeting this changing behavior. Jordan Park was founded in 2017 and now manages around $16 billion for 80 families.
Tiedemann Advisers, Align Impact, and Avivar Capital are other larger providers offering families access to impact-first investments. Tiedemann works with HNWIs and families to develop impact investment portfolios.
Single-family offices such as Sobrato and Dalios (led by US hedge fund manager Ray Dalios) are two Etzel mentions that have opted to hire one or two people responsible for impact-type activity instead of building a dedicated team.
Another theme stoking growth in the sector is the climate threat.
“From an intergenerational stewardship prospective, and what you are leaving to your kids, grandkids, climate has become a salient issue for a lot of families.”
Vehicles such as the Prime Coalition or Break Through Energy Ventures are "ideal initiatives" for family offices to channel investment that did not exist 5 years ago, Etzel says, whereby they can invest in a limited partner or general partner capacity in a host of companies in the innovative transition industries.
The overall picture shows that private markets continue to raise a majority of the capital for impact investing. Private equity is the largest asset class taking around half the total allocation, and private debt and infrastructure are the second and third largest allocators, according to 1,600 funds monitored by the Impact Database that tracks allocation.
Bridgespan has also seen a lot more hunger for information and understanding of the organizing principles and metrics that are developing the market.
The UN Sustainable Development Goals rolled out in 2015 have become the bedrock of the global challenges investors are aligning themselves with. A second relatively simple set of standards for impact measurement is the Impact Management Project. Around 2,000 stakeholders compiled the standards as a baseline for the questions and characteristics that potential investees should meet.
“By simple, 'Who is being affected? What is the effect? How big is the effect? What is the risk it might not happen? How much are you contributing to that as an investor?'” Etzel asks.
Another resource for family offices comes from the International Finance Corporation, the private equity arm of the World Bank, which has produced the Operating Principles For Impact Measurement, used by large global asset houses and private equity firms to assess impact.
An academic consortium led by Wharton is also gathering data on the financial performance, due diligence and governance of the sector globally.
For FOs operating their own due diligence on companies, look at what incentives entrepreneurs and companies are working to and share those metrics with the portfolio team, investors, and asset owners as a reminder that somebody’s compensation is on the line all the way through the chain, Etzel suggests.
“Compensation is a powerful incentive in capital markets, so tying impact to some of those financial incentives is a reasonable way of ensuring that everyone is aligned with the same set of goals,” he said.
FOs with an endowed private foundation or a donor-advised (DAF) account still provide the easiest areas to get families engaged with an impact-first approach.
“Product innovation in both segments allow families to take assets they have already committed to charitable purposes and, instead of just leaving them in an index account, redeploy some of them into impact-first opportunities,” Etzel counters. “You take on a little bit more risk but also pursue some outsize impact."