With the term ESG having been coined almost 20 years ago, it’s understandable that the world of impact investing has evolved. What was once considered a passing trend has become an integral part of investment portfolios in family offices.
Total impact investment funds surpassed $1 trillion last year. And while the growth and maturity of the sector looks promising, it’s not solely about the amount invested. As co-founder Antony Bugg-Levine of the Global Impact Investing Network (GIIN), which recently hosted its annual forum in Copenhagen, declared, “We should count success by the challenges solved, not the dollars allocated.”
With their global networks, long-term perspective and significant capital, family offices are uniquely positioned to contribute to this sector and help it maintain momentum. For the second year running, Simple has structured the impact landscape in an easy-to-digest format for next-gen family offices keen to explore more. Our research shows a handful of themes emerging within impact investing for them to consider.
Diversification and values alignment
The overall increase in diversification within investment portfolios is similarly happening within the impact segment. This diversification not only mitigates risk but also simultaneously supports the development of new impact investing initiatives. From renewable energy and social enterprises to backing impact-focused venture capital funds, a broad spectrum continues to expand. And family offices can not only help enable this diversification but also see it as a way to more closely align their investments with their values.
Values alignment should start with families defining those values, which can be tricky and differs among family members. There are various frameworks and organizations that can help here, with the goal being to come up with an impact policy statement.
Impact investments then need to be measured against this impact policy statement and reported on. Traditionally it was challenging for investors when it came to seeking an impact and claiming an impact. This has become more structured, and increasingly, best practices are being shared to lessen any difficulty.
Global resources and community
As the impact investment industry matures, so does the support ecosystem around it. Family offices and their global reach can play an important role here, not solely through their own networks and community initiatives but through supporting membership organizations and investor networks that seek to increase the flow of capital from around the world into impact initiatives. Many of these are either founded by or predominantly funded by family office investments with altruistic motives.
Credibility through transparency
Transparency was once considered more key to philanthropy, but it has emerged as a credible investment segment. Recently, it has faced some hurdles, including a politicized, anti-ESG narrative and greenwashing practices. But through accurate measurability and disclosure, the sector has shown resilience. A number of companies have emerged to provide impact and ESG data analysis and reporting tools to support the decision-making process and provide the transparency required for the segment overall.
As Robert Sturgeon of the Ontario Teachers Pension Plan said at the latest GIIN Forum, “Impact measurement is the cure to the politicization of ESG investments.”
Technology-empowered
Emerging technology is playing a crucial role in the transparency process. Companies are offering artificial-intelligence-powered tools for investors to assess the sustainable and impact profile of any fund in relation to ESG metrics along with blockchain-based services that allow tracking of an investment’s impact in real-time — adding a new layer of accountability that goes way beyond the usual financial reporting.
Such technologies enrich the impact space and, as they evolve, will increase the capability and ease with which family offices access benchmark data and adjust their investments accordingly.
Overall, the key ways in which new technologies are improving the value chain within impact investing include:
- Setting impact strategy
- Finding and evaluating deals
- Managing allocated investments
- Measurement and reporting, including direct feedback from stakeholders and access to external data sets.
A fast evolution
With impact investing being supported by emerging technologies, becoming core to investment strategies for family offices and benefiting from the growing global community of like-minded investors, the rate at which this segment evolves will increase at unprecedented speed.
And as it rapidly becomes more efficient, measurable and accessible, so, too, will the opportunities to embrace it become more significant. Family offices that pursue well-integrated impact investing portfolios in which the sustainability, governance and social objectives are aligned to their values should realize both lucrative and meaningful returns in the long term. In doing so they can help shape not just their own future but that of the entire world.