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Welcome to the third instalment of Horizons’ major series on impact investing: “Invest like it means something”. In this article, Dr. Falko Paetzold explores how impact investing can have a positive effect on family relations and build important values. To read the first release of this series, click here.

Summary:

·Impact investing can be highly valuable as a way for families to build family value through societal returns, financial returns, and experiential- and family returns.

·Societal return refers to the important role that capital allocation has on driving and scaling solutions for social and environmental challenges.

·Financial return data for impact investing funds and entire portfolios integrating impact is rare, but exists, and sustainable firms are shown to outperform.

·Experiential- and family returns are often forgotten yet important, as impact investing provides a unique chance to bring families together around shared values and to build investment capabilities amongst members that might otherwise opt out or be left out.

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“Every generation imagines itself to be more intelligent than the one that went before it, and wiser than the one that comes after it.”

George Orwell

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Families the world over naturally include multiple generations at any point in time. As younger and older generations alike can testify, many families struggle to build and maintain coherence as a strong unit. It is hard to get along and function well within and across different generations.

Next Gens and millennials thinking about whether impact investing could be interesting for themselves, or for older generations in their family, might consider the following:

A key feature of impact investing is that it can be a highly valuable approach for families to achieve three important types of value that are interconnected, but distinctly different. We describe these as experiential and family returns, societal returns, and financial returns. As such, impact investing can serve as what Dr. James Gifford – formerly a Senior Fellow at the Initiative for Responsible Investment at the Harvard Kennedy School, and now a Senior Fellow at the CSP – describes as the “Swiss Army Knife” to build family value. This describes the ability of impact investing to maintain a coherent family unit with financial means and positive societal impact.

 

Three types of returns of impact investing for families

Source: Falko Paetzold, James Gifford, Temple Fennell

 

Societal return

 

In terms of societal return, impact investing allows families to apply their values and beliefs consciously and systematically to their investments. This allows families to reduce or avoid problematic societal or environmental outcomes of investment activities actively, while at the same time increasing the positive impact of the family investments on the real world.

This is highly important from a societal perspective. By definition, capital allocation decisions are a main steering mechanism of which projects are pursued, and which are not, in the capitalistic free market based society in which we live. Impact investors provide capital to entrepreneurs and firms that are motivated and capable of solving social or environmental problems through market mechanisms. Therefore, the resulting solutions are not constrained by the amount of philanthropic capital that they can attract and spend every year, but they generate revenues, and can be replicated in other locations, or expand to serve more recipients in the same locations. This means that these solutions can be catalytic in solving the problems that they set out to tackle on a great scale. Prominent examples include the rise of microfinance, wherein large numbers of poor individuals, usually in groups of women, receive relatively small loans in order to initiate or expand business operations, and similar models for small and medium sized enterprises (SMEs) in developing markets.

 

Financial return

 

The financial return argument, and assumption of poor performance, will frequently be encountered by Next Gens or anyone that engages in conversations about impact investing. They will often be confronted with the assumption that impact investing equals philanthropy, at least partly, and that it equals sacrificing financial returns. This argument does not need to hold true.

Whether or not maximizing short-term financial returns must be, by default, the baseline guiding principle for families of wealth is another topic; albeit one that is, or perhaps should be, at the heart of any honest and sophisticated discussion about impact investing. However, the topic of financial returns and misconception around impact investing abound; hence we provide a brief summary of current findings.

On the level of individual companies, a large body of peer-reviewed academic research indicates that companies that perform well on sustainability measures perform better financially[1]. This points to better sustainability performance of a firm as an indication for good company management quality; something that intuitively makes sense and that perhaps gets forgotten too often.

Aggregation of >2,200 empirical studies assessing the relationship between sustainability and financial performance of firms

Source: Adapted from Friede, G., Busch, T., Bassen, A. (2015): ESG and Financial Performance: Aggregated Evidence from more than 2,000 Empirical Studies. Journal of Sustainable Finance & Investment 5 (4), 210-233

 

The financial performance of impact investing funds is not yet researched in detail. Investment opportunities exist that achieve above-market rate returns, market rate and concessionary returns; most fund providers as well as impact investors expect at least the same performance than with non-impact funds. Performance data is still rare and only two studies, published by Wharton and GIIN/Cambridge Associates, shed light on the performance of impact investing funds. Both studies had small sample sizes yet both studies indicate that impact funds do return attractive financial returns, and funds that outperform the market benchmark exist. For example, impact investing funds with less than USD 100 million in assets under management outperformed funds with a similar size that did not consider impact.

 

Studies assessing the financial performance of impact investing funds

On the level of investment portfolios, Charly and Lisa Kleissner published the composition of the portfolio of their KL Felicitas Foundation, while Annie Chen did the same with the portfolio of her family office RS Group, which included the work of Bonny Landers, now at Sandaire Investment Office. The reports outline in detail how these wealth owners integrate sustainability and impact aspects into all asset classes of their portfolios. Both portfolios performed similar or better than comparable mainstream portfolios.

 

Reports outlining the process, composition and financial performance of entire private wealth portfolios integrating impact across all asset classes

One aspect that often resonates with millennials in particular is the following: often it is significant global megatrends that provide the underlying driver of sustainable and impact investing opportunities, such as the need for clean energy, or an increased desire for healthy food.

 

Experiential and family return

 

Lastly, the argument of family and experiential return is often overlooked by Next Gens, families and advisers, though it is a very powerful argument for families to engage in impact investing. The process that is needed to engage a family to define what the family stands for in terms of values and desired legacy is a process that can help to bring the family together across generations. It includes conversations, values-mapping exercises, and looks into the past legacy of the family. This helps individuals to think deeply about personal values, to explicitly share these values, identify shared values, and to build family unity around common themes.

Further, a particularly important feature of impact investing is that the aim to combine impact with financial return can engage otherwise disengaged family members. This can relate to other millenials and Next Gens with less investment experience, or members that care less for finance overall, or that care in particular for specific causes, such as human rights, women’s empowerment, certain diseases, education, or climate change. Therefore, impact investing can help to draw individuals into the conversation about investing and family wealth management that might otherwise abstain from the conversation. Since impact investing includes the same financial terminology like mainstream finance, and requires the same processes, plus impact specific aspects, engaging with the theme can help to build investment skills amongst family members who might otherwise have abstained from acquiring these skills.

Lastly, an argument that Next Gens can consider, which positions impact investing amongst older generations, relates to the point that the careful consideration of impact can enhance the family reputation, and support its societal “licence to operate”. For most families, impact investing can be a logical progression to follow a proud history of service and responsibility. For them, impact investing is a new tool to advance that service across much more significant parts of the family portfolio, and with more robust and engaging mechanisms than were applied in the past.

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Dr. Falko Paetzold is the Initiator and Managing Director of the Center for Sustainable Finance and Private Wealth (CSP) at University of Zurich and a co-founder of the peer-to-peer Next Gen Impact Investing programme taught jointly at the CSP and the Initiative for Responsible Investment at Harvard University. He was a Post-Doctoral Fellow at the Sustainability Initiative at MIT Sloan School of Management. He is also the founder of the global network GreenBuzz that enables several thousand intra-preneurs in different cities to drive sustainability ahead within large firms.

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[1] See, e.g., a study aggregating more than 2’000 related studies: Friede, G., Busch, T., Bassen, A. (2015): ESG and Financial Performance: Aggregated Evidence from more than 2,000 Empirical Studies. Journal of Sustainable Finance & Investment 5 (4), 210-233