Family Office Impact Investing: Balancing Profit and Purpose

Family offices are increasingly turning to impact investing as a way to make a positive difference in the world while also generating returns. This approach allows families to align their investments with their values and create a lasting legacy.

Impact investing involves making investments that aim to generate both financial returns and positive social or environmental impact. According to a study, 70% of family offices now incorporate ESG (Environmental, Social, and Governance) factors into their investment decisions.

By focusing on impact investing, family offices can create a more sustainable and responsible investment portfolio. This can also help to mitigate risks and improve long-term returns.

A survey found that 80% of family offices believe that impact investing is essential to achieving their long-term goals.

Family office impact investing is a way for wealth owners to use their financial assets to make a positive difference in the world. It's a natural fit for family offices, as it aligns with their culture and mission.

Currently, family offices account for just 4% of the impact investors universe. This means there's a vast untapped potential for family offices to make a positive impact through their investments.

Investing for a positive impact can help preserve wealth for future generations, while also reflecting the family's deeply-held values and building a legacy for the future.

Consider reading: Genspring Family Offices

Impact investing is a game-changer for family offices, offering a unique opportunity to align investments with deeply held values and create a positive impact on the world.

Impact investing is growing rapidly, with US$715 billion now invested worldwide using impact criteria. The COVID-19 pandemic is expected to further increase the momentum, as the race to support those affected by the pandemic joins other positive goals.

By integrating impact considerations into all your investments, you can be sure that your net impact is in line with those values. This is especially important for family offices, as investors worldwide are increasingly recognizing that it's possible to combine a positive social and environmental impact with a financial return.

The returns from investing in sustainable business models are just as good if not better than from traditional investments. This is a key reason why family offices should consider impact investing.

Here are some key reasons why:

Family offices can choose from a range of impact investing options, including financial-first investments that prioritize financial returns while also achieving social or environmental impact.

Financial-first investments are suitable for family offices seeking to optimize financial returns, while also aspiring to achieve social or environmental impact.

Impact-first investments, on the other hand, prioritize social or environmental returns over monetary returns, but still expect some financial return.

Family offices can consider both financial-first and impact-first investments, allocating them to their private equity portfolio and philanthropic portfolio respectively.

Family offices can also provide a skilled and motivated team to help social enterprises grow and generate returns over time.

Alternatively, family offices can take a passive role through a minority stake in an enterprise or indirect investments in social impact funds.

There is no reason why family offices can't consider both financial-first and impact-first investments, making them a great option for those looking to make a positive impact.

Impact investing is growing rapidly, with US$715 billion now invested worldwide using impact criteria. This trend is expected to continue, with the COVID-19 pandemic accelerating the momentum.

Family offices are leading the way in impact investing, often reflecting the deeply held values and purpose that set them apart. They're now creating value and gaining a licence to operate through purpose and impact.

Investing in companies with positive social and environmental impact can lead to windfall profits if the company succeeds. This is particularly true for sustainable startup investments, such as those in alternative energy, agricultural, or environmental missions.

Investment is a deliberate allocation of resources, whether it's money, time, or effort, with the expectation of generating returns. This can be in the form of financial gains or positive social and environmental outcomes.

Impact investing prioritizes projects and enterprises that can deliver measurable impacts on issues ranging from climate change and renewable energy to education and healthcare. This investment strategy aims to bring positive social and environmental outcomes and financial gains.

Discover more: Social Investing

Investing involves making choices between different options, and in the context of impact investing, this means weighing the relative value of impact against the pure profit motive. Family offices are considering a blended approach to combining impact and financial return goals.

A key aspect of investment is measuring success, which in the case of impact investing, involves assessing both financial return and positive change facilitated. The success of an investment is measured not only by the financial return but also by the positive change it facilitates.

Some investment strategies involve direct involvement in the investment, such as engaging directly in impact investments and participating in innovative financing schemes like social impact bonds and blended finance. Family offices can also leverage their resources, longer-term investment horizons, and relatively flexible investment criteria to invest directly in innovative projects and companies that share and promote their values.

Here are some key considerations for investment:

Private equity investments are often made in larger companies that have a social or environmental mission.

Investors who focus on private equity typically look for established businesses with a strong track record and a clear purpose beyond just generating profits.

By investing in companies with a social or environmental mission, private equity firms can help drive positive change and create value for all stakeholders.

Curious to learn more? Check out: Impact Investing Private Equity

Investing in a startup's portfolio requires careful consideration of its potential for growth and alignment with your investment goals.

Investing in early-stage companies with alternative energy, agricultural, or environmental missions can lead to windfall profits if the startup succeeds.

Family offices considering impact investments should think about how to structure these investments, including the terms and how to exit. Impact funds can have 20-year terms and more evergreen structures to achieve their mission, requiring longer investment periods and patience.

Timing can be different than traditional fund investments, and family offices don't need to change their entire investment structure to pursue impact investments. This can be beneficial for family offices with a long-time horizon.

For your interest: Single Family Office Structure

Fees and carried interest in impact funds can have different elements and triggers, such as satisfying certain impact goals or thresholds to reach higher levels of compensation. Measuring impact for purposes of calculating impact-based compensation can be difficult and should be considered carefully.

Regarding exit strategy, there are no hard-and-fast rules, and family offices should consider governance and who will be at the table making exit decisions in a way that is consistent with their impact goals.

Here are some key considerations for developing an impact investing program:

Tax Law Considerations play a crucial role in impact investing, and it's essential to understand the rules to avoid jeopardizing investments.

Investments that jeopardize a foundation's tax-exempt purposes are subject to a 10% excise tax on the invested amount. This occurs when foundation managers fail to exercise ordinary business care and prudence in making investments.

Foundations should ensure their impact investments meet applicable state standards, as IRS guidance relies on state law for evaluating prudence.

Program-related investments receive more favorable tax treatment compared to other types of investments. Here are some key benefits:

However, foundations must exercise expenditure responsibility over program-related investments made to recipients that are not Section 501(c)(3) public charities. This includes ensuring the grant is spent solely for its intended purpose and obtaining full and complete reports from the recipient.

Effective impact investing is a realistic goal. A sound strategy can achieve both financial return and positive impact. Most impact investors meet or exceed their expectations, according to the Global Impact Investing Network (GIIN).

Rigorous due diligence is key to effective impact investing. Clear impact measurement criteria and ongoing management are also essential. Fortunately, family offices are well-positioned to provide this expertise and engagement.

The COVID-19 pandemic has accelerated the growth of impact investing. The race to support those affected by the pandemic is driving momentum, with US$715 billion now invested worldwide using impact criteria.

Impact investing allows families to align their investments with their values. It's a way to ensure that their net impact is in line with their family values.

Impact investing has come a long way in the last 30 years, expanding across both nonprofit and for-profit sectors. It now exists on a continuum of choices between impact and profit.

Market investors increasingly use impact investing as part of their standard portfolio allocation, and family offices are seeking ways to create a blended approach combining impact and financial return goals.

The use of screens is a key way for foundations to invest for impact, allowing them to determine which companies or sectors should be included in their portfolios. For example, a foundation focused on combating climate change could use a negative screen to exclude the oil and gas industry.

Impact investments are defined as those made with the intention to generate positive, measurable social and environmental impact alongside a financial return.

Impact investing and ESG (Environmental, Social, and Governance) are often used interchangeably, but they have distinct differences.

ESG focuses on the non-financial aspects of a company, such as its environmental impact, labor practices, and corporate governance. ESG investing aims to identify and mitigate these risks and opportunities.

Venture philanthropy, on the other hand, is a type of impact investing that focuses on supporting social enterprises and non-profits. It's a long-term approach that seeks to create systemic change.

Unlike traditional philanthropy, venture philanthropy invests in businesses and organizations that can scale and generate revenue. This approach is often used to address complex social issues.

Expand your knowledge: Impact Investing Philanthropy

DEI and ESG investing often focuses on investing in companies that target specific inclusion checkpoints or milestones by a particular date and for specific populations.

The SEC has not defined environmental, social, and governance (ESG), but does have a pending rule proposal out for investment advisers that use ESG strategies.

DEI investing is a way to incorporate diversity, equity, and inclusion practices into investment and ownership decisions.

Take a look at this: Esg and Impact Investing

Social impact investments are made to generate beneficial social outcomes along with financial returns, including investments in affordable housing, education, healthcare, and enterprises that directly address social issues.

There is no official definition of diversity, equity, and inclusion (DEI) investing, but it's generally understood to mean incorporating DEI practices into investment and ownership decisions.

Socially Responsible Screens are filters that help identify acceptable investments based on established parameters.

Foundations can use mission-aligned screens to determine which companies or sectors should be included in their investment portfolios. This can help them invest for impact and achieve their social goals.

A negative screen can be used to prevent a foundation from investing in industries they want to avoid, such as the oil and gas industry. This is especially relevant for foundations focused on combating climate change.

Positive screens can also be used to build an investment portfolio with companies that have strong reputations for governance, environmental, and/or labor practices. This approach can help foundations invest in companies that align with their values.

Working with an investment advisor can be a useful way to implement socially responsible screens and build a portfolio that meets a foundation's goals.

For your interest: Socially Conscious Investing

Social impact investments are made to generate beneficial social outcomes along with financial returns. These can include investments in affordable housing, education, healthcare, and enterprises that directly address social issues.

Over the last 30 years, the pace and scope of impact investing has significantly expanded, and market investors now increasingly use impact investing as part of a standard portfolio allocation.

Investments in early-stage companies with alternative energy, agricultural, or environmental missions can impact their success and lead to windfall profits if the startup succeeds. This includes companies with missions related to sustainable energy, agriculture, or environmental conservation.

Family offices are considering a movement away from a binary approach of either donative impact or pure market investing and are seeking ways to create a blended approach to combining impact and financial return goals.

In the context of private foundation capital within a family office structure, investment fiduciaries are more willing to incorporate the mission aspects and relationship of an investment with the charitable purposes of the foundation into a more traditional fiduciary investment review.

Measuring and monitoring investments is crucial for family offices considering impact investing.

Family offices can use metrics such as the Environmental Impact Metric (EIM) and the Social Impact Metric (SIM) to quantify the environmental and social impact of their investments.

Impact investing can be measured using various frameworks, including the Global Impact Investing Network's (GIIN) IRIS+ metrics.

These metrics can help family offices track their progress and make informed decisions about their investments.

The GIIN's IRIS+ metrics include categories such as Environment, Social, and Governance (ESG), which can be used to evaluate the impact of investments.

Impact investing can also be measured using the triple bottom line (TBL) framework, which considers environmental, social, and financial returns.

Family offices can use tools such as the Impact Investing Benchmark (IIB) to compare the performance of their impact investments to a benchmark.

By regularly reviewing and adjusting their metrics, family offices can ensure that their impact investments are meeting their goals and making a positive impact.

Family offices are navigating a complex regulatory landscape as they expand their impact investing activities. The US Securities and Exchange Commission (SEC) is focused on preventing greenwashing and protecting investors.

Family offices should be aware that the extent to which federal securities laws apply depends on the product and the operator of the strategy. They should also be mindful of the parameters of the family office exemption from investment adviser status.

Private credit and lending vehicles are becoming more common, offering a way to provide affordable credit to underserved communities. These vehicles can also be used for specific social welfare projects.

Curious to learn more? Check out: Investment Vehicle Definition

The regulatory landscape for family offices and impact investing is complex and evolving. The extent to which US federal securities laws apply depends on the product and operator of the strategy.

Family offices need to be mindful of the parameters of the family office exemption from investment adviser status. This exemption can be a crucial factor in their operations.

The SEC is focused on impact investing, particularly to prevent defrauding investors and greenwashing. This means that family offices must ensure transparency and honesty in their impact products.

The SEC and FinCEN have proposed rules to increase transparency and reporting about beneficial ownership. This push for transparency may impact family offices that value their anonymity.

Family offices continue to resist efforts to disclose their beneficial ownership. This is a key issue in the regulatory landscape for impact investing.

Family offices are navigating a complex landscape, and one key trend is the need for more in-depth reporting from impact funds. This can be a challenge due to the variety of unique investor goals and reporting requests.

Private credit and lending vehicles are becoming increasingly popular with family offices and other impact investors, offering a way to provide more affordable credit to underserved communities or support specific social welfare projects.

Family offices are also forming joint ventures and co-investing arrangements with foundations, nonprofits, and traditional money managers to team up on impact investment opportunities.

Complex program-related investments and philanthropic vehicles like grants, recoverable grants, and debt are being used to put capital in a first-loss position and leverage increased market investment to achieve greater impact through blended finance.

To get started with family office impact investing, define your impact objectives by pinpointing the issues that align with your family's values. This will help guide your investment decisions and ensure that everyone in the office is on the same page.

First, educate and align your team by ensuring each member understands impact investing and shares common goals. This will help you make informed decisions and avoid any potential conflicts.

Next, conduct market research to explore sectors and locations where your impact investments could have the greatest effect. This might involve looking at various industries, such as sustainable agriculture or renewable energy.

Develop an impact investment policy that covers asset allocation, risk tolerance, and return expectations. This will help you create a framework for evaluating potential investments and making informed decisions.

To identify specific investments, look for opportunities that match your impact goals, such as participating in social NGOs or environmental projects. You can also consider investing in early-stage companies with alternative energy, agricultural, or environmental missions.

Before making an investment, perform due diligence by conducting thorough financial and impact evaluations. This will help you determine an investment's potential success and alignment with your portfolio.

To measure and manage impact, implement a system to track your investments' social and environmental effects and financial outcomes. This will help you adjust your investment strategy as needed and ensure that you're meeting your impact objectives.

Here are the key steps to get started with family office impact investing:

Investing in renewable energy projects can offer competitive returns due to government incentives and the increasing efficiency of renewables. This can lead to returns that are on par with traditional investments.

Investors in affordable housing through Opportunity Zones can benefit from long-term returns and tax credits. These tax credits can significantly enhance the financial returns of such investments.

Here are some average returns for family office impact investments:

Let's take a closer look at some examples of impact investing. Investing in renewable energy projects, like wind and solar energy, can offer competitive returns due to government incentives and the increasing efficiency of renewables.

Renewable energy projects can reduce our dependence on fossil fuels, which is a major contributor to climate change. Investing in housing developments in Opportunity Zones can address homelessness and housing insecurity, while also providing long-term returns and tax credits.

Investing in education technology can improve access to quality education across diverse socio-economic backgrounds, driving innovation in learning while capturing financial value. This is a great example of how impact investing can have a positive impact on society.

Here are some specific examples of impact investing areas:

These areas not only offer the potential for financial returns, but also have a positive impact on the environment and society.

Impact investing returns can vary widely, but they should generally match traditional investments in similar asset classes.

In the case of impact debt funds, average returns ranged from 8% to 11% according to a GIIN survey, with the range depending on market maturity.

Investors can expect competitive financial returns from impact investing, making it a viable option for those looking to make a positive impact.

The average returns for impact debt funds were found to be between 8% and 11% in the GIIN survey, giving investors a clear idea of what to expect.

Family offices face two main challenges when it comes to impact investing: measuring impact alongside financial performance and finding and vetting quality opportunities aligned with the family office’s interests.

Measuring impact is a complex task, requiring a deep understanding of the family office's goals and values. This challenge can be particularly daunting for family offices that are new to impact investing.

Finding quality opportunities is also a significant challenge, as family offices need to carefully vet each potential investment to ensure it aligns with their interests and goals.

Intriguing read: Impact Investing Opportunities