Impact investing sounds great, and should in theory be a good for for family offices. But in reality, is it just too hard to get right?
A recent report by the World Economic Forum outlined the problems with impact investing in 32 dense, dispiriting pages. Impact investing (defined as “an investing approach that intentionally seeks to create both financial return as well as positive social and/or environmental impacts that are actively measured”) has a definite “buzz”. And it has been praised by everyone from the G8 to the Pope. But the WEF reports that just $50bn of the £13.5tr invested in sustainable or responsible assets are impact investments. That, of course, is just a tiny subset of global investment.
However, according to the WEF family offices are keen on it. The report claimed that 17% of family office funds are in impact investments. And there are good reasons that family offices are fitted to impact investing. For example, they have more discretion about what they invest in than institutions and so are able to make unorthodox investments; and their investments are often about legacy, not just returns.
That might be so. What is certain is that there are lots of ways to invest for impact. Dutch bank Triodos bank only lends to organisations that “benefit people and the environment”, while the International Finance Corporation (IFC) offers green bonds that finance projects to reduce greenhouse gas emissions.
There are impact investing funds, philanthropic investment firms like the Omidyar Network and opportunities in affordable housing in Angola, wind power in Kenya, sustainable croplands, waste disposal, VC investing - the list goes on. Choosing is daunting.
But there are many difficulties. Family offices are often small and lack the expertise for impact investing, and finding the right outside advisor is tricky. They have to learn how to evaluate risk, do due diligence and to monitor impact. If it is this complicated, is it really plausible?
Absolutely. “You do have to have expertise in service providers, it’s true you need raters for impact bonds, but you need raters for sovereign bonds,” says Andreas Hoepner from Henley Business School’s ICMA Centre. There are plenty of people willing to help, such as the Liechtenstein Academy and Morgan Stanley’s Institute for Sustainable Investing. Done right, says Hoepner, impact investing has far more effect than pure-play philanthropy and has more effect and so there is a great incentive to overcome the hurdles.
“It comes with its challenges,” says Charles Mesquita, Senior Director on Stanhope Capital’s Charities Team. Among the biggest, he thinks, are actually finding the opportunities, carrying out due-diligence and ongoing monitoring. Each project comes with issues that a simple donation doesn’t. If you are funding a microfinance project, for instance, you will need solid anti-bribery and corruption procedures.
You have to manage the emotional attachment to a project, too. “You have to be clear about what we are trying to achieve, and know how much you are willing to lose,” says Mesquita. “If they need more capital in the future, are you willing to fund it?” It doesn’t help anybody to keep funding something that isn’t working. Lots of start-ups fail, so it is not impossible that lots of new impact investing projects will, too. So you also have to think about reputational risk associated with pulling out.
Impact investing differs from other investments that recipients often want advice - an angel investor-type figure - as much as money. This is more labour-intensive than simply giving, but will add more value in the long-run. That is harder to measure, and more labour-intensive.
But there are two reasons that - despite its problems - impact investing will increase. Firstly, some of the hard work that early adopters are doing will be useful to future impact investors, says Charles Mesquita, for example in due-diligence procedures. Lots of useful groundwork will soon have been done.
And secondly, people want to do it. Andreas Hoepner says that the younger generation are much more concerned than their parents with sustainable investing. “When there is a handover of who is running the family office, they don't really change the investment approach but they want to integrate their own values into it,” he says. That means more sustainability, ESG and ethical investing.
Impact investing is, for all its problems, an unstoppable trend and family offices will have to learn to love it.