How family offices and other wealth management groups view impact investing, and the development of this style of money management, were put under the microscope recently at a FWR conference in New York City.

Impact investing is the “next phase of capitalism”, members of a Family Wealth Report conference have been told. 

The trend of seeking non-financial as well as monetary returns from investment is no passing fad or marketing ploy by firms trying to squeeze business from Millennials, but a firmly-established development that can ride out economic cycles, senior figures from the investment, family office and wealth structuring industries have argued. 

“I want business that I invest in to serve the community, not the other way around,” Josh Mailman founder and managing director, Serious Change LP, told delegates attending the event, operating under the title of Family Wealth Report Impact Summit: From Values to Value Creation. The conference was held at the Grant Hyatt New York. 

A noted exponent of Impact Investing over a multi-decade career, Mailman set out examples of his own investing successes – and failures – to illustrate how the business of investing with a purpose beyond financial gain was a viable one for the wealth management community. He has examples of his Social Venture Network, and his Serious Change enterprise (created in 2007), and its support for Andy Kuper, the founder of Leapfrog Ventures, that indirectly lead to the now $1 billion of global micro insurance investments they have made or will make. Other areas of concern include work in renewable energy, which has become a broad example of impact investing, he said. 

Impact investing, along with any other type of investing, carries risks, he cautioned: “Not all impact investments are going to have a happy ending.”

Mailman noted the trend among family offices and other large, ultra-high worth entities in putting money directly to work, as well as via funds. In certain cases, such as in the venture capital space, there is a need to think about diversification and risk management. “There’s no safety in numbers in doing venture capital but I would prefer to be with others when the cash calls come,” he continued.

Diversification is not just about spreading money around companies and sectors; the notion also applies to diversity in terms of gender and race. 
Mailman summed up by urging would-be impact investors to focus on subjects they really cared about rather than to spread their enthusiasms too widely. 

Panel 1
The first panel, under the theme of Inter-Generational Conversation: Combining Returns with Purpose, featured the following speakers: Susan Winer, Co-founder and Chief Operating Officer of Strategic Philanthropy; Julie Shafer, head of Strategic Philanthropy & Purpose Investing, Family Wealth Advisors Bank of the West, BNP Paribas Group; Randy Kaufman, senior vice president, EMM, and Ben Bingham, founder and CEO, 3Sisters Sustainable Management. 

Winer, who chaired the panel, said an aim was to “demystify” impact investing. Shafer argued that she was “convinced that money can be made with impact investment”. Kaufman said it was a problem that so many people still believed, wrongly in her view, that impact investing must lag the returns of conventional investment. With wealthy families, she said, the values of children will not necessarily be the same as those of their parents. It made sense for such families to let younger members put money into impact investing and therefore, among other consequences, to learn from mistakes as well as the successes. 

Bingham said “impact Investing is like other styles in that there may be good managers and not so good ones”, but that “the tendency of impact managers is to pay closer attention to what matters”. Riskier impact deals “can provide spice to the portfolio”, he said. “The journey from sustainable agriculture to managing money,” he said, citing an example close to his own experience, “isn’t a long journey”.
Impact investing can also provide useful diversification, or “seasoning” to a portfolio, Bingham said. He also spoke of how impact investing might be explained by his generation’s desire to re-connect with important values. “We were supposed to be the `peace and love’ generation but instead became the `Gordon Gekko’ generation. We want to turn that around.”

Asked by Winer if there was more talk than action around impact investing, Kaufman said that the position has definitely changed from where it was before. “10 years ago nobody had heard the term. There’s a lot of action,” she said, but said advisors need to be more educated about impact investing than they are at the moment. 

Panel 2
The second panel, taking the theme of Preparing for Impact: The Role of Advisors in Ensuring that Impact Really Delivers, featured the following speakers: Ned Dane, senior Vice President, Head of Private Client Group, Oppenheimer Funds; Adina Schwartz, Director of Client Engagement, 21/64; Casey C Clark, Director of Sustainable & Impact Investing, Managing Director, Glenmede, and Betsy Erickson, Senior Director, Arabella Advisors. 

UHNW millennials want to imprint their values and passions into their investment portfolios, Dane said. The availability of real-time news, and a heightened focus on human rights, education issues, and the environment, to name just some forces, had created a rich soil for impact investing to take root. “They [investors] want to find a way to align portfolios and wealth along with these dimensions,” he continued. 

The younger generation isn’t an optimistic one, Dane said, explaining how it has come of age through the 9/11 terrorist attacks, the 2008 financial crisis and the subsequent political and cultural fallout. “They want to be more conservative and preserve wealth rather than create it,” he said.  

Schwartz sought to put impact investing into the conversation about inter-generational wealth transfer, and about how this style of money management is seen as a way to engage the upcoming population cohort in the business of investing. “This isn’t just about passing the baton anymore,” she said. 

Clark said the rise of impact investing isn’t just a “Millennial thing”. “We are seeing more folks coming to us and saying that `I’ve read that impact investments can be made without sacrificing returns… Can we discuss your approach?’” “There are a lot more people talking about this compared to five years ago,” Clark continued. When asking people in the UHNW segment if they, or a member of their family, are interested in learning more about impact investing, around 40 per cent say yes. One of the most effective ways to transition a portfolio from a traditional to an impact-aligned portfolio is to take a step-by-step approach, moving in a slow, methodical manner. “For example, investors can transition 5-10 per cent of the portfolio over each of the next three years. All the while, comparing the performance versus traditional strategies and gaining comfort in the overall approach,” Clark said.  

Dane gave an example of how bringing up issues around values and non-financial matters can be used to help family members who are clients to improve their relationships. He concluded by stating that at present, many advisors wrongly think of impact investing as a trade-off.

Erickson argued that there are definite signs of a rise in client interest in impact investing.  

Panel 3
Discussing the title of Measuring Impact: The Challenges of Translating Principles into Investment Practice, the third panel in the conference, were Chris Fowle of PRI; Anisa Dougherty, Impact Analyst, Threshold Group; Christina Alfonso-Ercan, CEO, Madeira Global, and Richard Zimmerman, Advisor, WE Family Offices. 

Fowle pointed to the different ways that people think of “responsible investing”, such as those based on screening out investments deemed unacceptable to more positive approaches that seek out desired opportunities. “We are solidly of the view that this is for the mainstream investor.” 

Dougherty, talking about some of the methodologies in the space, said understanding of impact investing financial performance continued to evolve as the investable universe expands and noted the different levels of data availability for public market versus private market investments. On the public side, Dougherty noted: “There is evidence that ESG can be both additive to corporate financial performance and a signal of future risk.”

Alfonso-Ercan highlighted a USSIF finding that roughly $6.2 trillion of US-based assets now incorporate ESG approaches. “Non-financial data has historically been undervalued in investment decision-making." She said that adequately measuring non-financial (impact) performance and incorporating it as context for financial decision-making may be a valuable tool for both client and employee retention over time.

Asked by your correspondent about whether an influx of institutional money into the impact investing/ESG space might dilute some of the focus on non-financial outcomes, panelists said that “mission drift” would be an issue going forward, and had to be watched closely. 

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Panel 4
The fourth panel, taking the heading of Clearing a Path Through Complexity: Top Legal and Tax Considerations, featured the following speakers: Tom Riggs, Partner, Director Financial Services Tax, PKF O’Connor Davies, LLP, Financial Services; J J Harwayne Leitner, Counsel, Davis Wright Tremaine; Ed Morrow, Director of Family Wealth Consulting, Key Private Bank; John LaFleur, director, Strategic Philanthropy. 

Much of the conversation hinged around the various tax structures and vehicles – donor advised funds, private foundations, trusts and limited investment partnerships – that can be used to in connection with philanthropic and outcomes-based investments. An uncertainty – at the time of the conference – was the kind of tax agenda that might be put into force by Congress. Riggs noted that there are essentially two opposing views about what will happen if, for example, estate taxes are cut – the level of charitable giving will fall as the tax benefit(s) of giving are reduced,  or the level of charitable giving will be little affected since tax benefits were never the  prime motivator (Riggs believes the former). Riggs also expected that in the end some form of tax levy at death would survive, either in the form of a tax on the value of the estate, tax on unrealized appreciation within estate assets, or elimination of the tax basis step up at death.

Leitner said she thought individuals will continue to contribute to philanthropy despite what happens on the tax front; she predicted the increasing use of LLCs and other structures around charity going forward. 

Morrow said ending certain tax breaks around charity as part of a flatter tax code would possibly reduce philanthropy around the lower wealth levels. 

Winer noted that in 2010, when there was no estate tax in force, there wasn’t a noticeable cut in charitable giving. 

Leitner said that there is a perception that impact investing through structures such as private foundations might be difficult to achieve; she referred to the use of program-related investments (PRIs) which are investments made by a private foundation to accomplish one or more charitable purposes. PRIs are a distinct subset of the “mission related investment” (MRI) universe, and can be made in/to a for-profit or non-profit entity. There is an increasing interest in PRIs as the focus on mission investing generally has grown. PRIs must advance charitable purposes and may not be profit driven; they rarely have market-rate expected return. Riggs noted that the use of PRI’s demand significant regulatory disclosures and compliance monitoring. As a result, clients are seeking other philanthropic approaches. Riggs continued that philanthropy is moving in the direction of the use of LLC’s such as in PEP (‘Private Equity with Purpose’) and IPE (‘Internal PE’) LLC structures, which sidestep the strictures of traditional 501(C)3 approaches. The application of sound business principles and incubation/seeding PE approaches seem to appeal to G2 and G3Millennials, who seek more control and desire an acceptable return on capital., he said. 

Leitner said there are cases she has seen of cross-border, international philanthropy, but added: “Close due diligence [on philanthropy] is harder to achieve overseas.” Riggs agreed: “Whenever you go offshore, there’s added complexity.”

There was some discussion about the use of the increasingly widespread tool, the Donor Advised Fund. A number of organizations use DAFs to facilitate impact investing, and this is a growing area, delegates heard. 

Riggs concluded by saying that in the areas of philanthropy and impact investing he always applied “Occam’s Razor”, concluding: “The simplest solution is very likely the right solution.”

Panel 5
The fifth and final panel adopted this title: Impact Investing, Technology, and Venture Capital: How, Where, and Why. Speakers on this panel were Avi Sharon, Principal - Private Wealth Solutions, Blackstone; Liz Luckett, Managing Partner, The Social Entrepreneurs’ Fund; Matt Greenfield, Managing Partner, Rethink Education; Alessandro Piol, of Alpha Prime Ventures. 

Some of the conversation centred around how, with venture capital, an impact investing approach, far from being a “nice-to-have” added feature, could provide useful real Alpha and diversification in a portfolio.

“People are deeply entrenched in the idea that there’s a concessionary aspect [to impact investing],” Greenfield said, challenging that assumption. VCs need to be able to attract talent; impact investing can help with that, he said. 

Luckett framed impact investing, referring to examples from her own field, as being about “solving a social problem in a sustainable manner”.

Conversation turned to having a positive “impact” on the very real, current threats around cyber-security, and what to do about it. “Unless you focus on the technology it is almost impossible to be a good investor,” Piol told delegates. With other issues, such as the current spate of initial coin offerings – linked to the interest in crypto-currencies such as Bitcoin – Greenfield expected that about 99 out of a 100 ICOs will fail. 

Luckett said she sees big potential from an impact perspective in Big Data. Inequalities in access to information is a pressing problem, so solutions to this would be a positive step, she said. For example, certain information on people can limit access to credit and other important financial resources, she said. 

Sharon observed that it was thought-provoking to see that impact investing could actually reduce risk in VC and similar portfolios, a point that has perhaps not been hitherto highlighted in discussions around the topic. 

Presentations
Between the panels were a number of presentations. Gareth Davies, Head of Responsible Investment Solutions, Columbia Threadneedle Asset Management, spoke about data from Europe – a region relatively advanced versus North America in terms of impact investment. Out of a global total market (covering a range of approaches) of $22 trillion, Europe accounts for more than half of that figure, he said. 

Josh Cohen, Managing Partner and Co-founder of City Light Capital, gave a presentation about what his organization seeks to do. He described investments he holds that have specific outcomes, such as the ShotSpotter gunshot detector system, now in use across the US by law enforcement and other entities. (That business was in response to the fact that only about 20 per cent of gunshots that occur are actually called in.) Cohen urged delegates to avoid getting mired in definition issues. “Most impact investments have, historically, not been driven by a desire to produce market rates of return. But there are more and more impact investments that do produce such rates of return,” he said. More than half of the new impact funds in registration [in the US] are pursuing market rates of return, he said. 

A third presentation, on the theme of Impact and ESG Investing Through Mainstream Financial Markets, was given by Drew Schechtman, ESG Investment Leader, Voya Investment Management, and his colleague, Meg Sullivan, Vice President, Structured Assets & Alternatives. They explained the various ways that investors can select ESG-related investments, monitor portfolios and compare and contrast performance of such investments with those following different methodologies.

The final and fourth presentation, by AllianceBernstein, was given by Erin Bigley, Senior Portfolio Manager - Fixed Income. She spoke about how municipal bonds can be considered part of the impact investing toolkit, as many investments backed by municipalities, such as in education, social services and public amenities, have clear non-financial as well as financial outcomes.