Building a Portfolio

Why Impact Investing Is a Natural Fit for Family Offices

While interest in impact investing has grown among a wide variety of investors, one group of note is family offices. How—and why—are families making the move to impact investing?

Family Offices and Impact Investing

According to the most recent UBS Global Family Office Report, a quarter of family offices are engaged in impact investing. Over a third expect to increase their impact allocation to as much as 24% over the next five years, while 30% will allocate 25% or more.

Family offices generally report a positive impact investment performance record, according to the study. Eighty-one percent said that their impact investments met or exceeded their expectations. And 61% found that their impact investments matched expectations compared to their traditional investments of the same type over the previous 12 months. Twenty percent said those investments outperformed expectations.

As for where their investment dollars are going, the most popular vehicles were direct private equity (76%), real estate (32%), and private equity funds (24%). The most common impact areas for family office investment management were: education (45%), agriculture/food (45%), and energy and resource efficiency (43%).

Over a third of family offices reported participating in sustainable investing more broadly, with 62% taking a thematic approach and 46% using environmental, social, and governance (ESG) frameworks. Others used negative screening and shareholder engagement strategies.

Family offices benefit from a unique flexibility in making significant investments without the return demands and requirements placed on venture capital firms and other institutional investors.

What Is Driving the Trend?

For many family offices, impact investing provides a path to what Liesel Pritzker Simmons, co-founder and principal of Blue Haven Initiative, describes as “more informed investing.” She argues that impact investing is a natural fit because family offices benefit from a unique flexibility in making significant investments without the financial return requirements placed on venture capital firms and other institutional investors.

This is not to say that all family offices accept below–market-rate returns: “We are not willing to take a lower return just because it has social impact,” one principal of a European single family office told UBS. “If you do it the right way, you can achieve a return set to market.”

But family offices also tend to have lean decision-making structures that can be harnessed to evaluate new, creative financing approaches, according to Pritzker.

The result: family offices have a special opportunity to experiment with investments across the returns continuum, helping to build the field in the process. Such flexibility is particularly important for investing in early-stage enterprises that might be too risky for other investors.

An incoming wealth transfer to the millennial generation, many of whom are interested in sustainable investing, could further boost impact investing by family offices. In last year’s UBS study, nearly 7 in 10 family offices said they projected a wealth transfer over the next 10 to 15 years. Nearly 40% of those surveyed expect that when millennials inherit that wealth, they will want to increase their investment allocation to impact and ESG choices.

Challenges Ahead

Despite their enthusiasm, many family offices face barriers in their efforts to embrace impact investing. For example, a third of respondents to the 2019 UBS report believed that the sustainable and impact investing field lacks a sufficient number of well-known companies and investments with long track records. Twenty-two percent found it hard to measure the impact of their investments, and 16% reported a lack of education and understanding about the area.

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