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Redefining wealth management: How family offices can lead the charge in responsible investing
Family offices are uniquely positioned to drive positive change through impact investing by leveraging their wealth, influence, and values to create a legacy that transcends financial returns.
Family offices have traditionally been seen as guardians of wealth, focused on preserving and growing assets for future generations. However, a shift is emerging, led by forward-thinking family offices like The Nest.
Rather than focusing solely on wealth accumulation, this Brussels-based family office is committed to investing in ways that generate both financial returns and tangible social and environmental benefits.
“We strive to support long-term solutions based in nature as well as technologies that can enable the transition of our food system over the coming years,” explains CEO Els Thermote. “In both cases, we identify gaps and see where we can connect the dots.”
By aligning its investments with its values, The Nest exemplifies how family offices can leverage their wealth responsibly, which can be as rewarding as traditional approaches to wealth generation.
Many family offices are emerging as key players in responsible and ESG (environmental, social, and governance) investing because of the ascendance of the next generation within family dynasties.These emerging leaders, often driven by a deep-seated commitment to societal and environmental stewardship, are catalyzing a gradual but profound transformation in the priorities and strategies of family offices. Their inclination towards ESG investment is not merely a matter of preference but reflects a fundamental shift in values.
It is important not to confuse ESG with impact investing. While ESG compliance is widespread—over 50% of all assets under management in Switzerland are considered ESG compliant—it does not necessarily equate to contributing positively towards global challenges such as the Sustainable Development Goals (SDGs). ESG’s primary goal is to protect companies from external risks, not to achieve substantive social or environmental progress. Impact investing, by contrast, seeks to find companies that actually contribute in a measurable and additional manner to positive outcomes.
For example, Novo Nordisk, a pharmaceutical company addressing diabetes, is often cited as an impact investment due to its direct health benefits. On the other hand, Coca-Cola, despite being ESG compliant, produces products that can contribute to health issues like diabetes, highlighting the difference between simply avoiding harm and actively doing good. This illustrates why many progressive family offices are moving away from ESG as a measure of doing something positive, recognizing it as more of an internal management and risk tool rather than a means to drive meaningful impact.
The rise of the next generation within family dynasties is leading to a massive change in the overall strategy of family offices. These emerging leaders, often driven by a deep-seated commitment to societal and environmental stewardship, are catalyzing a gradual but profound transformation in the priorities and strategies of family offices. Their inclination towards impact investment is not merely a matter of preference but reflects a fundamental shift in values.
Fueling this shift is the monumental transfer of wealth from the baby boomer generation to their heirs and charitable entities, estimated to exceed $15 trillion by 2030. As the torch passes to the next generation, so too does the responsibility to wield their family’s legacy and wealth as a force for positive change.
A notable trend among these emerging investors is the establishment of dedicated investment vehicles with a laser focus on addressing critical societal and environmental challenges. These ventures, often founded with a mission-driven ethos from the outset, tackle pressing issues such as climate change, biodiversity loss, and social inequality.
Crucially, these investment vehicles offer inherent advantages for addressing systemic issues that extend beyond the traditional time horizons of venture capital. Unlike conventional funds with their short-term outlook, investments in areas like environmental conservation or public health may require patient capital with a much longer investment horizon, sometimes spanning generations.
The flexible nature of family offices enables them to explore innovative approaches to capital allocation, including hybrid models that blend philanthropy with investment strategies. Venture philanthropy, for instance, applies principles and techniques commonly associated with venture capital to charitable giving, emphasizing measurable results and sustainability.
Moreover, influential family offices often boast robust connections within the political world, further enhancing their capacity to effect change. By harnessing their influence and resources, these entities can advocate for policy reforms, foster cross-sector partnerships, and drive collective action on pressing societal challenges.
Whether focusing on impact or traditional investing, having a well-defined strategy and policy framework is crucial for guiding decision-making and ensuring alignment with their broader goals.
First and foremost, it’s essential to establish a solid foundation by defining the overarching goals, scope, vision, and mission of their investment endeavors. Once these fundamental aspects are clarified, the next step is to distill them into clear and tangible objectives. These objectives should encompass both the desired financial returns and the non-financial impacts that the investments aim to achieve.
With objectives in place, the entrepreneurial family can proceed to develop their investment strategy and craft comprehensive investment policy statements. Whether focusing on impact or traditional investing, having a well-defined strategy and policy framework is crucial for guiding decision-making and ensuring alignment with their broader goals.
Following the formulation of investment strategy and policies, attention turns to portfolio construction. This involves strategically allocating capital across various asset classes, industries, and geographies to achieve diversification while optimizing risk-adjusted returns.
By following these four steps, entrepreneurial families can position themselves to build a legacy that extends beyond financial wealth, leaving a positive imprint on society and future generations.
Whether it’s the number of products distributed, lives improved, or ecosystems preserved, impact metrics span a broad spectrum, further complicating the evaluation process.
Furthermore, beyond individual efforts, there’s a growing recognition of the power of collaboration and collective action. Several networks have emerged to facilitate this, providing platforms for investing families to come together, pool resources, and amplify their impact while also sharing insights and best practices. Examples include Nexus, AVPN (Asian Venture Philanthropy Network), The Impact Office, and Toniic.
However, realizing meaningful impact goes beyond financial returns; it requires robust methodologies for measuring and monitoring outcomes. While financial performance can be quantified with relative ease using standard metrics like Total Wealth Return (TWR) or Internal Rate of Return (IRR), assessing societal impact is far more nuanced and multifaceted.
One of the primary obstacles to measuring impact lies in the subjective nature of the goals pursued by family offices. Unlike financial objectives, which are typically standardized and universally understood, impact goals often reflect deeply personal values and priorities. Whether focused on a specific niche sector, geographical region, or target demographic, these goals vary widely among investors, making it challenging to establish a one-size-fits-all measurement framework.
Compounding this challenge is the diverse array of units used to quantify impact. While financial success is measured in monetary terms, such as profits, impact measurement relies on a myriad of indicators tailored to the specific objectives of each investment. Whether it’s the number of products distributed, lives improved, or ecosystems preserved, impact metrics span a broad spectrum, further complicating the evaluation process.
Muddying the waters is the absence of a universally accepted standard for impact measurement within the family office landscape. Despite numerous initiatives vying to establish such a framework, including the Global Impact Investing Network (GIIN), a clear frontrunner has yet to emerge. This lack of standardization leaves investors grappling with disparate methodologies and approaches, hindering comparability and transparency.
In response to these challenges, frameworks like the one developed by the GIIN offer a guiding light for investors navigating impact assessment. By delineating four key dimensions of impact – what, who, how much, and contribution – the GIIN framework provides a structured approach to understanding, quantifying, and evaluating the outcomes of impact investments.
- What: Understanding the outcomes and their significance for stakeholders. This dimension requires a deep dive into the tangible changes brought about by investments and their implications for those directly affected.
- Who: Identifying the recipients of the impact and evaluating their current circumstances. By understanding who experiences the effects of investments and how they are currently being served, family offices can tailor their strategies to address the specific needs.
- How much: Quantifying the number of individuals experiencing the intended outcomes and assessing the extent and duration of the changes brought about by the investments.
- Contribution: Examining whether the resulting outcomes surpass what would have occurred otherwise. This involves assessing the incremental value generated by investments and determining whether they have made a meaningful difference compared to the status quo.
However, not every family office is fully on board with these standardized frameworks. Recognizing the potential pitfalls of excessive complexity and analysis paralysis, many prominent investors are opting for a more streamlined approach to impact measurement.
Transitioning to venture capital and early-stage investments, where impactful opportunities often reside, introduces additional complexities to impact measurement.
Transitioning to venture capital and early-stage investments, where impactful opportunities often reside, introduces additional complexities to impact measurement. The burden of extensive reporting and data collection can overwhelm these entities, leading to delays and inefficiencies in assessing impact. However, by prioritizing common-sense approaches, investors can navigate these challenges while maximizing the effectiveness of their impact investments.
A case in point is the comparison between companies like drinks group Coca-Cola and drugmaker Novo Nordisk, both hailed as champions of ESG principles. While both companies demonstrate a commitment to sustainability, their impacts diverge significantly. While Coca-Cola’s products may contribute to health issues like diabetes, Novo Nordisk is actively engaged in combating the same ailment through its pharmaceutical innovations.
This example underscores the importance of context and discernment in impact assessment, highlighting the need for tailored approaches to evaluating the societal consequences of investment decisions.
The Nest, for example, is refining how it measures impact, especially as many of its investments are still in early stages. Its working with each company to identify relevant metrics, knowing this process will evolve as the businesses grow.
Beyond numbers, this family office aims to capture broader, systemic impact through case studies. “It is really important to have a clear vision of what you want to achieve and align your investments with your vision, mission and values,” says Thermote. “When you look at investments the key differentiator is the team you invest in far above the investment opportunity.”
Ultimately, family offices are uniquely positioned to drive positive change through impact investing, leveraging their wealth, influence, and values to create a legacy that transcends financial returns.
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