From the Carnegie Foundation in North America to the Li Ka Shing Foundation in Asia, wealthy families worldwide have long been making charitable donations to support worthy causes.(1) Based on a report prepared by UBS in collaboration with Campden Wealth Limited, families in Asia Pacific, through their family offices alone, donated an average of US$2.7 million each to philanthropic causes.(2)
Yet, only 25% of those same families reported that they were engaged in impact investing.
Charitable donations — while important and necessary to provide the financial resources necessary to overcome systemic and market based inequalities — are by their very nature, limited. Once expended, the grant is exhausted and the grant-maker must make a further donation if he/she wishes to sustain his/her cause.
Impact investments however leverage on these financial resources to generate returns which can then be recycled into the investment; same pool of resources, but a recurring and sustainable impact.
To give an example, a donation to build a hospital would be fully utilised on its construction. Any additional financial resources required by the hospital for its ongoing operations would then have to be funded by its own revenue, further donations from sponsors and government subsidies.
That same initial donation could instead have been invested in the hospital as equity in exchange for some management control over the running of the hospital, thereby enabling the investor to provide ongoing support to the hospital and potentially improving its performance in the long run; or as an unsecured long term loan to reduce the hospital’s cost of financing. The returns from such investments could then be recycled into the hospital or other worthy causes.
Family offices can add value to social enterprises
The hospital example is only one of the ways in which the family offices I work with have been making an impact on social causes through their direct investments. Others have invested in education, micro-financing platforms and other social enterprises which not only provide the enterprises with much needed capital but also allow them to leverage on the family’s brand and network to scale their operations.
Family offices are in a prime position to lead the charge on impact investing. Here’s why.
Family offices can bring market-based approaches to the social causes they care about, thereby reducing their reliance and dependency on government and donor support.
Family offices can tap on the infrastructure and resources of the family and their core businesses, whether in terms of technical support, financial expertise or simply drawing on the experience and wisdom of the founders. Therefore, they can offer invaluable experience and mentorship to the founders of these social enterprises. This in turn strengthens the enterprise’s fundamentals, creating a more financially sound and sustainable business.
Family offices provide patient capital for promising social enterprises which may not as yet satisfy the financial metrics and returns that traditional funds or financial institutions demand, due to their higher risk and limited track record.
Through their brand and networks, family offices can also help social enterprises scale thus driving adoption of the sustainable technology or practices that they promote.
It may be a common perception that impact investments provide limited financial returns, if at all. However, a survey by the Global Impact Investing Network finds that 67 per cent of impact investors target market risk-adjusted rates of return. Respondents also report that portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole.(3)
Apart from financial returns, impact investments can also complement the family’s philanthropic aspirations by bridging the gap between the family’s “for profit” business persona and its “for good” philanthropic one.
As the next generation of socially-conscious family members become more actively engaged in the business and impact investments, they can also positively influence the wider family and normalise investing for change. The returns that an impact investment can offer to the family thus go beyond the financial.
Wealth and purpose are not mutually exclusive
Impact investing is not without its challenges, and it is natural for family offices to have reservations.
Unlike financial metrics, how much good an investment has on society is not easily measured.
A healthcare social enterprise may be judged by the number of people that have benefitted from its programme while a micro financing platform’s impact may depend on the increase in small businesses in underbanked communities. Each impact investment is different and requires a different assessment criteria which lean family office setups may not have the resources to carry out. A charitable donation can therefore feel like an easier path.(4)
However, with more tools such as the ESG Book, which is an online platform which aims to make ESG data more widely accessible to investors, available to help investors assess their impact investments and increased regulatory scrutiny of greenwashing, the divergent path towards impact investments may not be as hard going forward.
As the environmental, social and other challenges societies face become more deep-rooted, government and philanthropy also cannot be expected to solve them on their own.(5) The United Nations has estimated that developed countries must contribute US$100 billion a year to developing countries in order to help the latter cope with climate change. It is clear that change requires cash and quite a lot of it according to these estimates.
Wealth and purpose are not mutually exclusive and family offices have a real value to add to this space. Just as populations worldwide have embraced the new normal created by the Covid-19 pandemic, family offices too, can and should embrace the new normal of investing for change.
If you have any queries, please feel free to reach out to your usual Withers contacts or Erlene Tan.
A version of this article was first published in the February 2022 issue of The Business Times Wealth.