Impact investing has become an increasingly important part of many family office investment portfolios. As wealthy families seek to align their capital with their values and desire for social impact, they are allocating more funds towards investments that can deliver measurable environmental and social benefits alongside financial returns. However, developing an effective impact investing strategy requires thoughtful planning and execution. This article will explore key strategies and case studies that family offices can leverage when implementing an impact investing program.
Clarify goals and align with family values
The first step is ensuring the family is aligned on the purpose, objectives and acceptable risk/return profile for the impact portfolio. Many families create an impact thesis that captures the issues they want to address, such as clean water, renewable energy, sustainable agriculture, affordable housing etc. They then set impact targets to help guide investment decisions. For example, a family may set a goal to reduce carbon emissions by a certain amount over 5-10 years. This provides guardrails for the investment team.
Leverage experts and intermediaries
Given the specialized nature of impact investing, it is advisable for family offices to partner with experts in the field. Many impact funds and wealth managers now offer impact advisory services and personalized portfolio solutions. Intermediaries like Toniic, Confluence Philanthropy and Align Impact provide education, investment platforms and peer networking opportunities. They can help family offices access high-quality impact deals and manage the portfolio effectively.
Consider a portfolio approach with multiple asset classes
Leading family offices utilize a portfolio approach across asset classes to balance risk, return and liquidity. The impact portfolio may include private equity, private debt, real assets like sustainable real estate and infrastructure, ESG public equities and fixed income, and cash equivalents. Diversification helps manage risk while generating both market-rate returns and societal impact.
Measure impact and financial performance
Tracking impact metrics alongside financial metrics is key for accountability and learning. Leading frameworks include IRIS (Impact Reporting and Investment Standards) and GIIRS (Global Impact Investing Rating System). Impact metrics could include number of affordable housing units created, greenhouse gas emissions avoided, amount of renewable energy generated etc. Ongoing performance assessment informs portfolio optimization and strategy evolution.
When executed strategically, impact investing can align family office capital with values while meeting risk-adjusted return targets. Clarifying goals, leveraging experts, diversifying across asset classes and measuring performance are key success factors.