Impact investing and the Role of Family Offices

Over the next decade, will wealth become a unifying force in addressing global problems or a point of divisiveness among wealth holders? Before we can answer this question, we need to understand the role that family offices—private investment companies that steward the financial resources of wealthy individuals and their families—will play in the impact investing space.

Family offices are unique as investors: They have a significant volume of assets under management, autonomy and flexibility in making investment decisions (compared to other asset owners), and a growing desire to align wealth and values. All of this positions them as catalytic among asset owners within impact investing.

Impact investing—an investing approach that intentionally seeks to create both financial return and positive social and/or environmental impacts through active measurement—has entered the mainstream mindset, and many individual and institutional investors are interested in getting engaged. Yet many investors lack informational resources and practical knowledge on how to translate this compelling concept into a sound strategy. This situation is especially true for family offices, many of which see impact investing as a way to create “multi-dimensional wealth” by aligning wealth and values, and ensuring a lasting legacy.

According to Family Wealth Alliance, single and multi-family offices represent roughly $1.6 trillion in assets under advisement in North America. A 2013 Financial Times survey found that family offices allocated 17 percent of their assets under management to impact investments, with a broad spectrum of exposure from 1 percent to 100 percent for some single family offices in the United States, United Kingdom, and Switzerland. Yet according to a 2013 CFA institute study, 66 percent of financial advisors said that they were unaware of impact investing.

The World Economic Forum recently released a “Primer on Impact Investing for Family Offices”—a resource that family offices can use to start conversations on impact investing internally with family members, and then to more broadly craft and design an engagement strategy. While the report’s main goal is to help interested family offices ask the right questions about their fit with impact investing, it is also designed to provide families already committed to impact investing with actionable tools to make impact investments. Importantly, the insights and frameworks offered in the primer can provide guidance to family foundations, multifamily offices, investment advisors, intermediaries, and policy-makers as well.

Each family office’s motivations, operational contexts, and goals for impact investing are unique, and there is no standard course that fits every family. Successful impact investors are upfront about their intended impact and the metrics they will use to measure it. The primer provides actionable insights on how interested investors can define their impact investing vision, and offers various approaches to engage, design, and implement their impact investing strategy based on each family’s unique starting point and motivations.

The Forum identified five high-level steps for family offices to engage in impact investing, and provides insights and resources for each step.

Step 1: Establish a clear vision. Before a family can understand the constraints and opportunities for an impact investing strategy, it must agree on its impact and financial goals, values, and desired future legacy.

Step 2: Determine how to engage. It is ambitious for a family office to begin by reallocating a significant portion of assets to impact investing. It is often preferable to use a more gradual and iterative process after examining internal capabilities, and considering available resources, knowledge, and expertise. The primer highlights four engagement approaches, including allocating a portion of the portfolio or creating a carve-out to “test the waters” and integrating impact across asset classes.

Step 3: Develop investment guidelines. Formalized investment guidelines help family offices ensure a smooth execution of the strategy. Families that already have an investment policy statement or investment guidelines can update them with impact goals and evaluation criteria. A clear vision of impact areas and investment goals that balance the interests of various family members can make the wealth transfer to the next generation smoother.

Step 4: Execute investment strategy. Deploy capital based on the investment guidelines and impact portfolio construction model. An impact portfolio construction model—which can be driven by asset allocation or by impact theme or region, or focused on direct investing—is based on the impact objectives and traditional financial parameters for risk tolerance, return objectives, liquidity profile, and spending needs.

Step 5: Evaluate the portfolio regularly and adjust strategy as needed. While executing the investment strategy, family offices should periodically review the successes and setbacks, and refine the investment guidelines accordingly. Clear and defined impact and portfolio goals upfront will facilitate the evaluation process. Based on the results of the evaluation, the family office can refine its investment strategy with updated impact and portfolio goals.

For those family offices that decide to engage meaningfully with impact investing as the sector matures, the opportunities to create multi-dimensional wealth will be worthwhile. Our hope is that advisors and investment intermediaries who are mindful of investors’ evolving preferences will tap into this growing market opportunity, which will in turn lead to an increase in institutional-quality impact investment products and their broader adoption, ultimately bringing the sector to scale.

For more information and examples, see “Impact Investing: A Primer for Family Offices.”

Read more stories by Marina Leytes, Beth deBeer & Abigail Noble.