Family offices put greater emphasis on impact

As awareness of ESG risk factors including climate change, supply chain issues and social impact grow, family offices are increasing their impact investments and using their unique position to craft mission-driven strategies.

While this type of investing sometimes gets painted as a generational issue driven by the desires of millennials and Generation Z, a number of family offices have been in this space for decades.

Rockefeller & Co. LLC, for instance, launched the first iteration of its Odyssey mission-driven venture capital strategy in the 1970s. According to the 2022 iteration of "Investing For Global Impact: A Power For Good," a private wealth survey from Campden Wealth on behalf of Global Impact Solutions Today and Barclays Private Bank, 32% of private wealth portfolios include some form of impact investing strategy and that figure is expected to increase to 50% within the next five years. Four in 10 respondents said they expect between 80% to 100% of their portfolios to be in impact investments by that time.

The survey, which was conducted between April and July 2022, had 149 participants and family offices represented 58% of respondents.

USING ALL AVAILABLE TOOLS

Builders Vision, a family office-backed impact investment platform, takes an "all available tools" approach to impact investing. Builders Vision targets four areas: food and agriculture, climate and energy, oceans, and community improvement projects.

There are three CIOs that lead investments for Builders Vision based on these four areas. Builders Vision uses a combination of direct investments, venture capital and growth equity, a cross-asset portfolio that includes third-party investment managers, and philanthropic investments.

There are also flexible pools of capital that Builders Vision uses to make investments in areas where they make so-called impact-first investments. These are investments that are higher risk.

"We have the flexibility to go into areas and make investments where we're hoping to build markets that will eventually have market rates of return but in the interim have high impact," explained Noelle Laing, CIO for the Builders Initiative, one of the investment teams within Builders Vision. "These are in areas like energy, food and oceans. We're making investments with first-time fund managers and early-stage companies either in debt or equity."

Ms. Laing said that using this broad approach allows them to maximize the investment opportunities that are available to them as well as the potential for positive impact. "There's a lot of white space in impact investing for people to come together with goals they want to achieve and craft solutions around that. We try to stay flexible so that we can find the right opportunities."

Builders Vision has created an internal impact measurement and management system that it uses to evaluate all of its investments to make sure that they are meeting the goals of the four focus areas.

According to Ms. Laing, the system works both as an initial screening framework to sort through investment opportunities and then once an investment is made, the system makes sure that investments are meeting their impact goals.

"It's a qualitative and quantitative process," she says. "We don't want it to become another compliance box that gets checked; we're engaged throughout the life of our investments."

Both Ms. Laing and Kathleen Simpson, CEO for the Russell Family Foundation, said that flexibility and specificity are two keys to a successful impact investment strategy. Having the flexibility to invest across asset classes can create new opportunities. It's also important to set clear impact goals. By narrowing the approach to specific focus areas, it is easier to measure impact and make sure that portfolios stay aligned, they said.

The Russell Family Foundation was launched in 1999 following the sale of the Frank Russell Company to Northwestern Mutual Life. Jane and George Russell funded the foundation with proceeds from the sale and have subsequently used the foundation to issue grants, run community programs in the Puget Sound region, and launch an impact investing program that started in 2004. The work of the foundation focuses on climate finance, education and food systems.

In the beginning, impact investing was a small part of the foundation's total portfolio — accounting for only 7% of investments in 2014. At that time, Ms. Simpson said, the foundation made a decision to divest its exposure to fossil fuels and undertake a review of its investment portfolio.

"It was really a time for us to pause, reflect and say we want our whole portfolio to align with our values," Ms. Simpson said. "We have a lean internal team and we work with external financial advisers to create our strategies. We had them model portfolios for impact. We found that we could make impact portfolios that didn't require us to make concessions on returns."

The foundation's investment portfolio is now 94% aligned to its impact goals for sustainability. In October, the foundation announced a net-zero commitment that will decarbonize its portfolio by 2030.

Like Builders Vision, Ms. Simpson said they use a variety of tools to meet these goals. They use divestment, negative screens, portfolio tilts and investments in specific funds that naturally align with the work the foundation already does on sustainability.

"We want to be able to maintain the foundation, and we have been able to do that effectively with a portfolio that is reflective of our values. We believe all investments have impact — good and bad — so you really have to look closely at what those are and whether or not they match with what you're trying to achieve," Ms. Simpson said.

STAYING ABOVE THE FRAY

Families play a unique role in the impact investing landscape because they can take on risk or craft their own impact goals, which may be challenging for large institutions subject to fiduciary or recent legislative limits on ESG/impact investing.

That could give them a bigger role to play when it comes to sustainable investing — at least until the backlash against public funds blows over

Katherine Hill Ritchie, director of strategic development Nottingham Spirk, a single-family office investment platform, said what often gets lost in the backlash conversation is that looking at impact or ESG factors is merely adding another layer of risk modeling to an investment process. "If you're looking at issues of governance or whether a company is having a significant adverse impact on climate — those are risk factors, it's not purely about values," she said. "We're talking about making good investments — you want to have all of the available information so you don't end up on the wrong side — this is important data to get."

Builders Vision calls these risk factors "system frictions."

"If you're looking at food, for example, there is a lot of friction in the food system. We can look at how to improve that and create something that is more resilient and humane. That's going to lead to long-term investment performance," said Ms. Laing. "The opportunity set for impact is robust and growing. We think that's positive from an investment perspective and in terms of the impact we are trying to achieve."

From Pensions & Investments, a sibling publication of Crain Currency