Impact investing as a new asset class

Article 3 of “ESG factors and Impact Investing” series

Impact investments are a type of investment that seeks, in an intentional and measurable way, financial returns allied to positive social and environmental impacts. Within a traditional spectrum of investments, they would be beyond ESG factors but precede philanthropy, since there is an expectation of financial returns. These expected returns may be below market, as in the “impact first” strategy, but also within or above the market on specific issues that also bring positive environmental or social impacts.

The spectrum below translates the investment types and where the impact investments would be placed.

	CLASSIC INVESTMENT	RESPONSIBLE INVESTMENT	SUSTAINABLE INVESTMENT	THEMATIC INVESTING	IMPACT FIRST	PHILANTROPY
GOAL	Selecting investments that maximize the returns adjusted to risk	Avoid investing in sectors and companies considered “bad”	Actively investing in sectors and companies considered “good”	Investments aimed at a specific social or environmental issue	Investments that maximize social and/or environmental results	Selecting charities that maximize social and/or environmental results
STRATEGY	Management of passive or active investments	Negative screening of certain sectors and companies (such as fossil fuel, tobacco etc)	Positive screening of certain sectors and companies based on ESG factors	Selecting investments in target impact sectors (like education or healthcare)	Selecting investments with maximum positive impact potential	Traditional donations

Source: Bridges, Sustainable & Impact Investment – How we define the market. 2012; USHER, Bruce. Palestra: Impact Investing Ventures from a U.S. Perspective. The Tamer Center for Social Enterprise, Columbia University, São Paulo, 2017.

According to the Global Family Office Report 2017 survey, conducted by Campden Research, more than 60% of family offices worldwide are somehow engaged in philanthropic activity. In Brazil, the number should be similar, if not higher.

In recent years, however, a significant part of the traditional philanthropic activity of families has been directed toward impact investments. According to the same survey, about 30% of family offices are already engaged in some form of impact investments, while another 30% are planning to engage in some way soon.

Among the main benefits for a family to develop an impact investment program are:

1. Create a positive legacy so that a portion of the portfolio is aligned with the goals and values ​​of the family in a more sustainable way in the long-term;
2. Engaging the new generations, allowing the family to pass on their values ​​and bring more members into the family office’s financial decisions through impact investing. A recent UBS survey has shown that for 90% of people under 30 years old, financial wealth is much more about having experiences and impact than to possess material assets.
3. Opportunity to create a “training program” in investments allowing family members with different interests (not only financial) to engage. In addition to the benefit of transmitting the family’s values ​​and culture of positive impacts, it demonstrates the importance of due diligence and measuring financial returns and impact over time. Or, as said at a conference, “a mix of Warren Buffet and Mahatma Gandhi” that unites people with different interests within families.
4. Union and family legacy through joint decisions and portfolio return measuring that address different values ​​and goals within a family, so that there is a better communication and relationship between the different generations.
5. Greater cooperation and ease of developing a global network with other families and family offices that pursue similar goals.

Within the spectrum of impact investments, some address more family goals with a bias toward philanthropy, while others, such as sustainable energies, health, and education, can successfully address families whose goals are more directed to entrepreneurship.

According to 2017 Global Impact Investing Network (GIIN) data, with a universe of 208 investors, the total assets in impact investments amounted to USD 114 billion, with most of them invested in the housing, education and microfinance sectors.

Source: Annual Impact Investor Survey. Global Impact Investing Network. 2017.

For 91% of investors, financial returns are the same or better than expected, and for 98%, social and environmental returns are the same or better than expected. This demonstrates, in practice, that the industry has grown consistently and sustainably.

Many family offices establish their focus within impact investments based on one or more of the 17 sustainable development goals (SDGs) of the UN 2030 Agenda listed below. According to GIIN data, 37% of investors measure the impact in relation to the sustainable development goals.

Source: United Nations.

Some families are also looking for a portfolio completely comprised only of impact investments, developing processes and methodologies to achieve this goal in a not very long time horizon and in a way that will not jeopardize the capital preservation. This is a great challenge, but it has created strong cooperation among families with similar goals.

Another challenge for families has been the difficulty in accessing companies, products or impact managers. There is, on the one hand, a low knowledge, or willingness, by banks and asset allocators of impact investments. On the other hand, there is difficulty for families in Brazil to know and access the best impact funds already consolidated in the US and Europe.

It is fundamental that the market gets better structured to meet this growing demand from families, especially those that are in advanced stages of maturity as investors and well organized.

Impact investing is still in its initial stages in Brazil, but already with a prominent participation of some family offices and funds. It is expected that the strong growth seen mainly in the US and Europe reaches Brazil in a few years and that the sector will develop rapidly. Thus, investor families will have more alternatives and will be able to engage more actively in impact investing.

 

 ANTONIO FERNANDO AZEVEDO

Partner at INEO and co-author of The Investor Family and the Family Office.