Aligning philanthropy and impact investing: How families can truly change the world
Many families are now recognising the role their investments can play in enhancing the positive impact of the causes being championed by their family philanthropy
MANY families have a desire to give back to society and use their wealth as a force for good. While this has traditionally been achieved through philanthropy, we have seen a recent rise in impact investing as an increasing number of wealth holders see the value of aligning investments with their philanthropic goals.
Historically, the objectives of investing and doing good are distinct from one another. The basic tenet of investing is to generate a financial return. Philanthropy, on the other hand, is about doing good for society without expectation of a financial benefit.
Often, philanthropy also goes beyond money. Many philanthropists contribute time, skills, networks and expertise in pursuit of societal good, and often towards causes they deeply care about.
Within families, we often see different family members taking on separate roles in either investments or philanthropy.
It is quite typical to see certain family members or foundation trustees oversee the stewardship of capital to maximise the endowment’s returns; while others take responsibility for their giving strategies, focusing on the societal issues they are trying to solve.
This separation of roles can clarify allocation of responsibilities, but it can also mean missed opportunities for family members to amplify the impact of their wealth.
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Many families are now recognising the role their investments can play in enhancing the positive impact of the causes being championed by their family philanthropy.
The rise of sustainable and impact investing over the last decade has also created new opportunities to combine the pursuit of financial returns with societal benefit.
Understanding how investing and philanthropy can be connected and looked at holistically is a powerful first step in changing the approach towards creating impact.
Impact investing, according to the Global Impact Investing Network, is investing with the intention of generating positive, measurable social and environmental impact alongside a financial return. Investors can seek to meet their financial goals and use their capital for good at the same time.
It is part of a broader sustainable movement that includes ethical investing (excluding certain investments based upon personal values) and responsible investing (incorporating environmental, social and governance considerations).
The concept of impact investing is very powerful because it channels a different type of capital towards positive purpose; the financial element can help to scale the impact made.
Integrating investments, impact and philanthropy can be transformative. At the same time, doing so can be complex and nuanced depending on the desired outcomes.
Families need to consider their risk and return expectations as well as desired impact when setting objectives and evaluating investments.
Sustainable and impact investing can encompass a broad range of strategies across a spectrum, with strategies being more impact-first on one end and finance-first on the other.
Philanthropic capital is at one end of the spectrum. This 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, philanthropic capital can be useful when commercial financing is limited, risks are too high or difficult to quantify, or needs are urgent.
Impact investing, on the other hand, 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.
While some families may prefer one approach over the other, others have adopted a blended approach combining both philanthropy and impact investing.
For instance, philanthropic capital can take first-loss positions in hard-to-fund projects to make the investment more commercially viable for traditional investors to follow suit.
Others might support initial, high-risk ventures with grants at an early stage; and then make subsequent financial investments as these projects mature.
To begin connecting investing with philanthropy, establishing a common set of family values and objectives at the outset can serve as an important solid and shared foundation from which to build subsequent efforts.
The process of defining core family values and purpose can help cement relationships and unite generations around common goals.
This process can also enable older generations to pass on insights and values, which helps secure a lasting family legacy. This can help to form the basis of the overall impact strategy and define how family capital can be used for investing and giving.
Families will need to agree on topics such as impact objectives, priorities, capital allocations and family roles.
This will help create a good foundation to facilitate alignment and, ultimately, decision making among the various family stakeholders; who will likely have different approaches, impact preferences and risk appetite – often along generational lines.
Taking a more strategic and holistic approach to philanthropy and impact investing offers families the opportunity to create a lasting legacy.
This journey is often deeply personal and may sometimes be a challenging process. It requires balancing a myriad of factors – from what the world needs, to the family’s own circumstances and motivations.
It can, however, be enormously enriching if you see how your wealth can create positive and meaningful impact for a brighter future world.
The writer is head of Barclays Private Bank, Singapore
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