IMPACT GENERATION: RISKS AND REWARDS OF SUSTAINABLE INVESTING FOR NEW FAMILY LEADERS
Sustainable and impact investing continue to be attractive for family offices and are among the fastest growing areas in the average family office investment portfolio. But uncertainty persists for many interested in the asset class, with fewer expert advisers compared to more traditional classes.
Family offices increased their foray into sustainable investing over the past 12 months, with more than one-third (38%) now engaged in the practice, according to The Global Office Family Report 2018 (GFOR).
Significantly, nearly 45% of the families are planning to further increase their allocations to sustainable investing over the coming year and 39% are expecting to increase their allotment to sustainable investing when the next generation takes control of the family’s wealth.
As a next-generation leader, Leon Fear, director of UK-based international property investors Fear Group, says his company is looking into investments in areas such as clean water and particularly energy and food.
“Our in-house research, which generates areas of interest for us, is increasingly showing clean water, food production, and sustainable energy as areas of significant growth which are hugely important from a social point of view,” he says.
But Fear, who runs Fear Group with his father Stephen, says families should exercise due diligence when deciding to invest in this relatively nascent space and not leap blindly into an investment that looks good on paper.
“In my experience there are always challenges with any investment, but this is especially true in areas which are unproven and unknown. Knowledge is key so understanding the given sector and working with chosen operational partners who can demonstrate their understanding and knowledge is vital.”
Mission-driven investments are broadly defined as an investment strategy that incorporates environmental, social, and corporate governance criteria into the investment process. Clean energy, water, gender equality, and healthcare are among the more popular mission-driven sectors families are investing in.
It is a trend that is being largely driven by the next generation of family office leaders, who are in tune with the media and more socially aware than their predecessors, says Carolina Moura-Alves, head of fixed income strategy at wealth manager UBS.
“Sustainable investing has become increasingly mainstream so at some stage it becomes difficult to avoid investing sustainably,” Moura-Alves says.
“We see the next generation coming on board and this younger generation are more often aware of sustainability issues and they are looking to deploy their wealth in a more sustainable way.”
As part of the increase in sustainable investing, impact investing—investing for the purpose of a financial return and measurable social and/or environmental impact—has also continued to prove popular with families. Now 32% of families are involved in impact investing, up from 28% last year. More than half (54%) of families also plan to increase their allocation to impact investing over the coming year.
While family offices and families have always been extremely active in philanthropic investments, impact investing has become increasingly popular because it allows families to combine traditional philanthropic activities with their return-generating investment activities.
Private equity (67%) and equity (39%) were the most common asset classes for impact investing, but families also used real estate (27%), microfinance (21%), private debt (20%) and alternatives (17%) as vehicles, the GFOR reported. Education is still the most popular cause for impact investing (51%), followed by housing and community development (49%), agriculture and food (49%) and women’s empowerment (43%).
However, Fred Fruitman, managing director of Loeb Holding Corporation, the US-based Loeb family’s investment arm, suggests while impact investing sounds attractive, families need to be more realistic about their expectations of returns.
“It is an interesting and worthwhile thing to do and it serves a social purpose and you might get good returns, but I don’t necessarily buy the argument that impact investing will give better returns than the rest of your portfolio,” Fruitman says.
“I think that is nice if it happens, but if you are going to venture into impact investing, you have to do so because you believe in what they are doing and the profit and return from it is only secondary.”
Measure what matters
While the next generation is set to increase its family office’s exposure to impact investing, families still face a number of challenges. The measurement of impact from investing is the most common issue (56%), with families often resorting to using investment performance as an indicator.
One next generation family member and partner from a European single family office—who wishes to remain anonymous—says being clear about expectations is key to measuring investment success.
“How do you measure the benefit of impact investments made to education in the developing world? It is challenging enough to know if the standard of education being delivered is good enough, if it is being delivered to the intended recipients, or to know how the children use their education to better themselves in the future.
“Due diligence, identifying expert advisers and understanding what sort of impact you want is key.”
Catherine Grum, head of family office services at KPMG, agrees and says it helps to have a view of where on the impact-to-return spectrum families want to sit.
“Are they undertaking this exercise because they want to create a particular impact first and foremost while hopefully generating some financial return, or are they focused on generating good financial returns by investing in businesses which are more impactful? Both options are available, but it helps both the family and, ultimately, the company or fund they are investing in, if their expectation is clear at the outset.”