Many families desire to use their wealth as a force for good, to create change, and to make the world a better place. For most, giving back to society has traditionally been through philanthropy. In recent years, however, impact investing has been a rising trend.
Historically, the objectives of investing and doing social good are separate pursuits. The basic tenet of investing is to generate financial returns while philanthropy focuses on using money for societal benefit, with limited or no expectation of capital being returned. Philanthropy often goes beyond financial contributions. In addition to their financial contributions, many donors contribute their time, skills, and networks to further the causes and initiatives they support and care about.
Often, philanthropy has a powerful element of “heart” and can hold deep meaning for the giver. Because of this, we see many families assign separate leadership roles to different family members to oversee and pursue investing and philanthropic activities independently. For example, certain family members or foundation trustees typically oversee the stewardship of capital to maximise the endowment’s returns, while others take responsibility for their “giving strategies”, focusing on and understanding societal issues and how to solve them.
While this division allocates roles and responsibilities clearly, it can also limit the potential amplification of family wealth. An increasing number of wealth owners now recognise the synergies between investing and philanthropy. They consider the role their investments can play in enhancing their philanthropic mission and think more holistically about their wealth by connecting their giving with their investing.
Impact investing, as defined by the Global Impact Investing Network, involves making investments that will generate positive and measurable social and environmental impact alongside a financial return. Investors want to meet their financial objectives and use their capital for good at the same time. This is part of a broader sustainable investing movement, which also includes ethical investing (excluding certain investments based on personal values) and responsible investing (taking environmental, social, and governance factors into account in investment decision-making).
This concept of impact investing is powerful. Through it, a different type of capital is channelled towards positive purposes, ensuring that the impact made and its scalability are magnified.
Integrating investments, impact, and philanthropy requires careful consideration and can be quite nuanced, depending on the desired outcomes. Wealth owners have many options when it comes to using their capital for good. Sustainable and impact investing encompass a broad spectrum of capital, with investors adopting a variety of strategies depending on their risk, return and impact profile. The approach could be more “impact first” or “finance first” with everything else in between.
Philanthropic capital is at one end of the spectrum. It is a highly flexible form of funding that is used when long-term, patient capital is required. As there is no need to consider financial returns, philanthropy can be useful when commercial financing is limited, risks are too high or difficult to quantify, or needs are urgent.
Impact investing is more constrained, but aims to satisfy both financial and impact criteria. As a result, it has the advantage of scale and the ability to reinvest or reallocate any returns to increase the potential impact even further.
We have observed some families preferring one approach over the other, but it is also becoming more common to see families adopting blended approaches to financial planning. For example, philanthropic capital can take first-loss positions in “hard-to-fund” projects to make the investment more commercially viable for more traditional investors. As a result, some have staged their capital to meet the needs of a single project, such as using grants to fund ground-breaking projects at an early stage, before following up with subsequent financial investments.
Bringing philanthropy and investments together can, however, be challenging to implement effectively. There are a myriad of considerations and options that make this topic extremely complex.
First, it is important to understand the motivations behind taking a more holistic view of wealth. Who should be involved in decisions about aligning investing and philanthropy? Which part of the portfolio does the family wish to align: business investments, family investments, or foundation investments? How can the family begin the process of reviewing existing portfolios, allocating a small amount of capital for experimentation, and/or refining the investment strategy?
To begin the process of alignment, it is important to establish a common set of family values and objectives. This can serve as a solid shared foundation to build on for the future. Understanding a family’s core values and family purpose cements relationships and unites multiple generations around common goals to help secure a lasting legacy.
Agreeing on topics, such as family values, priority issues, capital allocations, and family roles, will provide a good foundation. From there, everyone can start looking holistically at using family wealth for impact. This is important since stakeholder perspectives often reflect different appetites for risk, impact, and experimentation.
Additionally, some of these differences may be intergenerational since younger generations tend to drive the initial interest in impact investing. Integrating a family’s philanthropy and investing is often a long journey. The first step is to review their current situation and understand their philanthropic aims and efforts relative to their current investments. Based on family values and impact objectives, they can then determine whether these align or conflict. That foundation allows them to make informed decisions about whether, when, and how to make changes and what investment actions to take. The entire process is a journey of understanding and learning how investing can be used proactively alongside grant-giving to help address societal challenges.
Taking a strategic approach and building a family legacy can be deeply personal and challenging at times. It requires balancing a multitude of factors, from what the world needs to what your family’s circumstances and motivations are.
When you know you can use capital to influence positive change and shape tomorrow’s world, the journey can be immensely rewarding and impactful.
