Germany’s 4L Vision has become the latest in a small, but growing, tribe of single-family offices 100% committed to impact investing.
Converts set out to achieve good socially responsible returns through proactive portfolio management. And families are shaping the movement in ways institutions with harder financial targets do not often match.
The microfinance movement was an early example of impact investment drew on the provision of loans to farming communities first developed by Friedrich Wilhelm Raiffeisen in the 19thCentury.
Social housing saw its UK origins in initiatives by the Guinness and Peabody families. The term “impact” investing was first coined by members of the Rockefeller Foundation in 2007.
As it nears its 100% target, 4L Vision wants to reach out to other families interested in joining forces through a multi-family, or fund-based, model.
Investment director Peter Brock believes impact investing will play a developing role in the post-coronavirus era, as active managers analyse a far broader range of issues which impact on society and the companies that support it.
He is less enamoured with Environmental, Social and Governance benchmarks which do not facilitate engagement from passive managers or clients.
The latest MSCI World ESG universal index has seen annualised returns of 6.7% in the ten years to March 2020, against 6.6% from the MSCI World. Over three months, the fall in oil and bank stocks means the ESG index is down by -19.8%, against -21% from the MSCI World.
Does this really make an impact? Has engagement improved? Are investors thinking things through?
Brock is dubious: “There’s always a risk of greenwash in these things. You should see the passion of our research analysts. They read through everything. They check the small print. They don’t miss a thing in their quantitative and qualitative analysis.”
Some research-driven managers like Generation, MFS, Baillie Gifford and Robeco do incorporate sustainability into their financial forecasts. But mistakes are made elsewhere by managers who fail to do their homework. In a recent survey, Morningstar found that 60% of funds marketed as free of fossil fuels retained an exposure.
Brock believes impact investing should be developed by family offices in phases: “You can start with 10% in impact. Then, if that works, you can divest fossil fuel companies like Shell or Total, and move towards 100% impact.
“If you get too keen on planting trees that can be counterproductive. If, however, you combine portfolio balance and diversification with impact investing, that works well.”
He accepts that governments and central banks felt the need to act to save jobs in the old economy due to the coronavirus. But impact investors need to evaluate whether companies will be dragged down by these legacy businesses.
“A Swiss client of mine said, if he ended up paying banks negative interest rates, he’d prefer to look for growth, through impact. Hopefully, post-Coronavirus, polluting business models won’t be rescued, as capital is directed towards those using a social and ecologically friendly approach. Impact will, and should, be the new normal. Studies show that long-term investors would already be better off investing in impact-driven companies.”
4L Vision’s founder is Ralph Suikat, founder of software provider STP, ultimately sold to private equity firm Hg Capital. His chief executive at 4L is Johannes Knorz, while Brock, former head of family office services at EY, takes on investment issues.
4L Vision likes to network. It is involved with the German Federal Initiative for Impact Investing. It is also affiliated with Toniic, a global forum for active impact investors, with affiliations to 400 family offices, and foundations. Toniic’s partners include the Quandt family’s BMW Foundation and Ford Foundation.
Gratitude Railroad is a newer investment model set up by Howard Fischer, head of hedge fund Basso and Eric Jacobsen of private equity firm Dolphin Capital.
Another Toniic supporter is Jochen Wermuth of Wermuth Asset Management, which like 4L Vision, is shifting towards 100% impact.
He recently told Toniic: “We do it across asset classes. So the cash we keep in a green bank account; we buy green bonds; equities, we try to exclude the Underground 200 – the largest fossil fuel producers – and related companies on the long side, but we do short them.”
Israel’s Nathan Cummings Foundation and the Kleisser family’s KL Felicitas have adopted a 100% philosophy. Toniic’s T100 project, endorsed by the Rockefeller Foundation, draws together family offices with this objective and cross-fertilises ideas.
It also puts stress on the United Nation’s 17 sustainable development goals, ranging from action on climate change to poverty elimination.
4L Vision likes making a direct investment into companies and causes not least because this puts impact money to work straight away. Its investments include Kumpan Electric (scooters); Ecoworks (construction); FCH Gruppe (credit); PMCR (healthcare) and Veganz (plant-based food).
4L also backs Ralph Suikat’s Fairanwortung, a charitable adviser which delivers socially-aware projects. These include Trinkfair, which campaigns for the quality of tap water. It has just set up DurckblickMacher, an app which helps small businesses and the self-employed find financial support from the government and banks.
Peter Brock has reservations about listed stocks, not least because buying and selling shares on the secondary market does not lead to a direct investment in impact.
“But we do have a portfolio of 30 to 40 stocks which we see as impactful. We can contribute to their growth through capital raisings. And if you have concerns about the way a company is going we could use our vote. Governance is an important tool for impact investors.”
Sustainable real estate is an area of interest, stretching into social housing projects and 4L’s investment in Ecoworks. Bonds can be approached through green bonds or sustainable issuers. 4L Vision’s portfolio is equally divided between bonds, listed equity, private equity and real estate to achieve an appropriate level of diversity under the impact umbrella.