Impact investing has caught the attention of many family offices in the past few years, particularly the new generation of heirs. The idea that investments can be better aligned with social values of a family while still earning returns is undoubtedly a lucrative one.
Despite the buzz that surrounds impact investing, many family offices with the enthusiasm and means to invest lack the necessary information resources to develop investment strategies, not knowing where to start and how. According to the UBS Global Family Office Report, nearly 70% family offices are still not engaged in impact investing due to several potential reasons including:
Lack of awareness or understanding of impact investing
Preference for making a “difference” through philanthropic means
Ambiguity about how to measure social and/or environmental impact
Concerns about financial performance
Impact Investing Approach
Prior to making any investment decision, the family office should consider developing an investment strategy. The difference between traditional investment strategies and impact investing strategy is that, more focus is on social and/or environmental impact of the investments. This would mean that, family offices must define:
What social/environmental impact the family wishes to have versus its expectation of return?
What is the definition of impact?
How are investments made to lead to this goal?
The following 3-step simple framework can guide family offices through the process of developing an impact investing strategy:
Define investment priority: It is important to be able to answer the following questions while defining the investment priority –
What is the priority – financial performance or impact performance?
What would be the optimum mix of impact vs return?
What proportion of the portfolio is targeted towards early stage investment vs growth?
Define the impact, return and goal: Deciding what the impact goal will be, which includes vision and values, sector depth preference, theme, geographic focus, etc.
Define family mission, vision and values
Consider the family sector knowledge to determine the investments to hold within the portfolio
Decide on sector focus, impact goals and investment themes
Define geographic breath preference
Evaluate your assets: Each family investor has assets that are beyond just cash. These could be monetary and non-monetary such as expertise, network resources, knowledge database, etc.
Consider the size of the portfolio after considering the time commitment required, pace of learning that will be needed and need for diversification of risks
Decide on which vehicles to use. The more varied the vehicles and tools, the more flexible one can be
Define non-monetary assets. This involves identifying one’s strengths and weaknesses as an investor, knowledge gap or strength, access to network, etc.
After designing the investment strategy, it is also necessary to determine how the success of the investment will be measured. A variety of tools can be used as guides for measuring impact investments such as Global Impact Rating System (GIIRS), Impact Reporting and Investment Standards (IRIS) and Impact Management Project (IMP).
While we understand that impact investing may not suit all family offices, the goal of this article is to help enthusiastic families ask the right questions and understand how they can take initial steps to put it into practice.