Despite their ambitions in the area, family offices are finding it tough to identify high-quality investments which can generate a positive social and environmental impact, as well as a financial return. Challenges in conducting due diligence, measuring impact, and securing deal flow in private markets are acute.
Waiting for the best private opportunity delays progress, however. So family offices keen to make an impact should urgently consider the rapidly growing range of innovative public funds that target sustainable outcome.
Family offices have tremendous resources to generate impact through unique private market investments. Their role in the area will become increasingly important, as the next generation gets more involved in management
At least $50 billion worldwide is managed with an impact lens through registered investments funds such as mutual funds and UCITS strategies. They attracted $7 billion of inflows during 2018.
Overall, $76 billion of net new money last year went to registered funds with an intentionally sustainable, responsible, or impact investment objective. This record amount was followed by a powerful $26 billion in the first quarter of 2019 despite a roller coaster ride for stocks late last year.
Around $10 billion of the total inflow last year went to strategies that directly addressed climate change, the environment, green bonds, electric vehicles, and carbon-efficient strategies. But much more can be achieved.
Such funds may not represent the preferred vehicle for family offices, but can serve as liquid allocations to deliver some real impact while they search for more attractive investment opportunities.
Family offices, by supporting publicly distributed impact funds, can also help to scale solutions and make them more readily available to a yet broader range of investors. Never underestimate the power in pooling investments, and networking.
The best-selling funds reveal a clear shift in demand towards impact investing. In addition, many of them are aligning the UN Sustainable Development Goals (SDGs) with their objectives. The European Union’s new classification system – or taxonomy – for environmentally-sustainable economic activities will provide investors with another way to measure the impact of their investments.
Some funds offer access outside mainstream asset classes to alternative strategies such as green bonds and microfinance. A large number lean heavily toward emerging markets where SDG outcomes can spark real change.
Amundi has proved what can be achieved last year, launching Planet Emerging Green One (EGO) with a remarkable $1.4 billion of assets. The Luxembourg-domiciled fund invests in emerging market bonds with the allocation to green bonds rising to 100% over a 7-year period. It received a cornerstone commitment from the IFC, a sister organisation to the World Bank, and raised capital from other institutional investors across Europe and the Middle East.
The IFC and Amundi expect their fund to encourage local institutions to issue green bonds. An IFC-managed technical assistance program will support the creation of new markets for climate finance by developing green bond policies, providing training programs for bankers, and facilitating the adoption of best practice, across the world.
Switzerland-based BlueOrchard Finance introduced its Emerging Markets SDG Impact Bond fund in October 2018. Assets reached €230 million by April 2019. The Luxembourg UCITS aims to provide investors with a liquid alternative with exposure to emerging and frontier markets through investments that advance the SDGs.
It invests in bonds of development banks, financials and microfinance institutions, with the aim to foster financial inclusion and fund economically vulnerable communities around the world. Focused impact targets include sustainable infrastructure projects and clean energy initiatives.
In addition, BlueOrchard’s older flagship fund attracted €395 million in 2018 and sports €1.6 billion in assets.
Montanaro Better World, one of the best-selling impact funds last year, also aligns with the SDGs. It raised €153 million of net flows to invest globally in small and mid-cap companies that make a positive impact on society. It uses the 17 UN SDGs to assess impact, condensing them into six themes to identify companies whose products or services tackle sustainable issues.
Through both funds and direct investments, the impact investing market exceeded $500 billion at the end of 2018, according to the Global Impact Investing Network.
The IFC suggests the potential investor appetite for impact investing could end up reaching $26 trillion – $21 trillion in publicly traded stocks and bonds, and $5 trillion in private markets including private equity, non-sovereign private debt, and venture capital.
To help set a market standard, the IFC introduced a set of nine operating principles for impact management in collaboration with industry participants. First adopters comprised 60 organizations, among them Amundi, AXA IM, BNP Paribas, Credit Suisse, Nuveen, Prudential Financial, UBS, and Zurich Insurance Group.
Family offices have tremendous resources to generate impact through unique private market investments. Their role in the area will become increasingly important, as the next generation gets more involved in management.
Funds represent a great way to start deploying this approach, pending the development of direct investing opportunities – and ways to measure their effectiveness. Family offices also need to be prepared to work with the reserves of talent employed by asset managers and other institutions to achieve the operating scale that really will make an impact.
Jag Alexeyev is the founder of Impactvesting LLC, a consultant that helps financial services companies to create and distribute sustainable, impact investment, and ESG solutions.