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Welcome to the fifth and final instalment of Horizons’ major series on impact investing: “Invest like it means something”. This time, Dr. Falko Paetzold explains why Next Gens and families are critical for worldwide sustainable development. To read the first release of this series, click here.

Summary:

  • ·Families can be critical in building the ecosystem as they found, support and advance the institutions which drive impact investing ahead.
  • ·Based on their unique capabilities, families can be critical in seeding and underwriting innovations, such as the first-time funds that drive new impact investing models ahead or help prove other models.
  • ·Since banks and service firms offer what their clients demand, if that demand is prominent enough, families can substantially expand the envelope by demanding impact solutions in their existing relations with banks and intermediaries.
  • ·In particular, because the private wealth community is very secretive, a critical contribution can be to act as a precedent and spread the word about impact investing amongst peers.

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Public policy, public funds and private philanthropic capital are insufficient to solve humanity’s main challenges. For example, consider the funding gap to reach the Sustainable Development Goals, which has been calculated by the UN itself to amount to $2.5 trillion per year.

 

United Nations Sustainable Development Goals

Source: United Nations

 

 

Annual investment gap to achieve the Sustainable Development Goals

Source: Source: UNCTAD (2014), World Investment Report 2014: Investing in the SDGs: And Action Plan, United Nations Conference on trade and Investment

 

By comparison, the $40 billion of philanthropic capital in the Bill & Melinda Gates Foundation could provide for 1.5% of that gap, for one year.

Therefore, private capital is required to address the world’s major challenges. Commercial investments have been shown to be effective in solving some of such problems, such as the “banking the under-banked” approach of microfinance.

In that regard, we observe an evolving understanding amongst Next Gens in particular that philanthropic goals (i.e. societal returns) can often be achieved effectively when they are embedded in revenue-generating business models. Importantly, investing and receiving the invested capital back also allows impact investors to re-invest and re-deploy the same dollar several times, as opposed to the single time that a philanthropic dollar can be deployed. Further, it appears that impact investors often are more engaged with their investments and the management teams than they are with traditional investments, that are only financially motivated on one hand, or than donors often are with their philanthropic endeavours. This engagement of impact investors, in turn, can support the business validity and also the societal impact of impact investees.

Families and stewards of private wealth historically have been critical drivers of innovation, and economical and societal progress. This section outlines how families can be true to this opportunity and responsibility – especially in the context of impact investing and sustainable development.

 

Build the Ecosystem

 

The impact landscape is moved along by a broad, lively and growing “ecosystem”, i.e. a community of organisations and individuals that interact with each other and that form a marketplace for information, products and services. Interestingly, it appears that many of the most influential platforms are initiated and/or run by foundations and wealth owners themselves, and not by wealth management firms, NGOs, or government agencies.

Examples are provided by HNWI/UHNWI peer-to-peer communities like The ImPact, TONIIC, or Put Your Money Where Your Meaning Is Community (PYMWYMIC).

The leading platform for impact investing organisations is Global Impact Investing Network (GIIN), “a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing”. One important offering of GIIN is ImpactBase, a comprehensive platform outlining more than 400 impact investing funds, a key piece in matching private capital with impact investing opportunities. Like GIIN, The ImPact is also supported by members of significant families, e.g. the Rockefeller family, and several other stewards of private wealth.

As such, an important role for families in leading the way is to be key supporters of the ecosystem that emerges in order to build both the demand and the supply side, as well as research and education.

 

Seed and underwrite innovation

 

Private investors often find themselves in the privileged situation that they can allocate significant capital to promising investment opportunities that might be out of reach for institutional investors or for retail investors. This is a different, and important, situation compared to institutional investors and retail investors. Institutional investors, such as pension funds, are often constrained by regulation which does, for example, perhaps over-estimate the risk of infrastructure investments or emerging markets, while overly penalising multi-year lock-in periods. At the same time, private retail investors only have limited access to impact investment opportunities due to advisers and due to the often high minimum amounts required.

However, private investors often follow institutional investors and consultants, their precedent and their advice. This distorts the market, in particular for innovative impact investment opportunities and funds that might require longer lock-in periods, or that engage in investments that for some reason might be perceived as riskier than they actually turn out.

Therefore, private investors have a key opportunity, and, some might argue, responsibility to be at the forefront of seeding and underwriting innovation as prudent yet progressive and able investors, unfettered by artificial or perhaps outdated constraints.

 

Ask the Question: banks, family offices, service firms

 

The sustainable and impact investing theme has for a long time suffered from the typical chicken-and-egg problem; advisers and managers at private wealth management firms would point to a lack of client demand as the reason for inaction when it comes to providing information and investment options. Providing such information and investment options arguably would help clients understand the topic and unlock latent and explicit demand.

As such, research indicates that even those wealth owners that ask for such investment solutions might not receive it, even if the adviser has been trained in sustainable/impact investment options and should have the requested information ready[1]. This is due to a number of aspects, from a certain danger to get into conversations about banks’ fee structures once sustainability topics are discussed, to recent ethics-related scandals, to the common narrative amongst finance professionals that sustainability/impact are outside of the investment equation.

With the information that is provided in this report and elsewhere, stewards of wealth can be stern in their request for information and demonstrate such demand. They can importantly move the needle as they request information from their counterparts within private banks, family offices and service firms.

 

Be a precedent; spread the word

 

A key feature of the private wealth community is its strong focus on privacy. This is a key barrier for new knowledge, including information related to impact investing. The issue is amplified by the combination of (a) dominance of advisers and private banks as some wealth owners’ main source of information, (b) some advisers’ and banks’ resistance to informing clients about sustainability/impact, and (c) a certain disinterest of some stewards of private wealth in the details of how their wealth is deployed, even though it might currently be diametrically opposed to what they are interested in or care for.

Therefore, perhaps one of the most important activities for wealth owners interested in advancing the consideration of sustainability and impact is to actively explore the theme and to communicate about it with other wealth owners.

Wealth owners that want to go a step further can publicly or semi-publicly prove the case for sustainability and impact as a real-world option for good portfolios by making their activity or portfolio public. A ground-breaking precedent of doing so is Liesel Pritzker Simmons. Together with her husband, Ian Simmons, she launched their Blue Haven Initiative single-family office that is strongly focused on the integration of sustainability and impact aspects into all of their investments and across all asset classes. While that is remarkable, it is highly important and notable that she actively decided to take on the role of being a highly vocal wealth owner that provides a credible case for the real-world possibility of doing what she does, including by frequently speaking at conferences, providing quotes and insights for articles, and supporting a broad yet strategic set of initiatives that allow wealth owners to follow suit.

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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 theSustainability 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., Paetzold, F., & Busch, T. (2014). Unleashing the Powerful Few: Sustainable Investing Behaviour of Wealthy Private Investors. Organization & Environment, 27(4), 347–367.