Institutional investors also deeply engaged in forward-thinking approaches to incorporating mission, values and ESG into investment portfolios
Boston (October 4, 2016) – Family offices are among those leading the movement toward impact investing, the integration of values and investment strategy and the search for market-based solutions to social and environmental challenges like poverty, climate change and hunger.
Next-generation – or “Next Gen” – and millennial investors have in large part been behind the increased interest in impact investing, according to a new report from global investment firm Cambridge Associates, “The Foundation of Good Governance for Family Impact Investors.” Industry data says that one in three high net worth investors either invests or is interested in investing in impact strategies, and 85% of millennial investors believe social impact is important to investment decisions.
“Impact investing is a fast-emerging strategy among many families and institutional investors, and since there is no single approach, many families and institutions are helping define best practices to advance the effectiveness of impact programs and the array and availability of impact investing opportunities,” says Erin Harkless, Senior Investment Director at Cambridge Associates and co-author of the report.
Family offices that have had success with impact investing structure their approach around purpose, priorities and principles:
- Define the purpose. Many families and institutions refrain from simply diving into an impact program, and spend significant time defining their purpose – their core values and what they hope to achieve. The purpose may be to seek long-term, competitive returns within a framework of environmental, social and governance-focused (ESG) investment, or to pursue investment opportunities that promote the dignity of all people.
- Formalize where the passions lie. Another best practice that many family offices and institutions follow is not only confirming and articulating the purpose of impact investing initiatives, but also identifying their priorities – whether it be the environment, healthcare, education or another of many other issues that can be addressed by impact investors.
- Establish principles to align investment decisions with purpose and priorities and ultimately guide the implementation of the impact program. Guiding principles might include the idea that all investments have impact, that investments are an opportunity for engagement through advocacy, that ESG investments should not detract from financial returns or that the impact program should provide continual learning for the family or institution.
“Using this framework of purpose, priorities and principles is a great way to get everybody in an organization or a family on the same page, and can help set them up for successful decision-making and long-term success,” says Harkless.
A family or institution can then pursue other key decisions, such as:
- Deciding whether to incorporate impact investment decisions into existing governance structures for the broader portfolio, or to create a separate governance model only for the impact program.
- Considering the extent to which the impact program will exist in tandem with a family’s or institution’s broader philanthropic or grant-making activities, or any other prior or existing efforts to address specific social or environmental issues.
- Choosing a strategy for implementation. Four possible implementation strategies are opportunistic deployment, which entails a case-by-case evaluation of impact investment opportunities; defined implementation, in which a specific set of impact parameters – for instance, exclusionary screens to avoid specific types of investments like fossil fuel or tobacco companies – determine the shape of the impact program; a carve-out approach, where the organization develops a distinct portfolio of impact investments; and full integration, in which impact investments are part of the total approach to investments. “Full integration aspires for full alignment between an institution’s values and its total portfolio,” says Harkless.
- How best to pivot or re-evaluate when an impact program hits a roadblock. Impact programs often are not perfect the first time around, and the ability to adapt and benefit from lessons learned – instead of throwing in the towel completely – is key.
“The exciting thing about impact investing is that it’s constantly evolving, and everyone is learning from each other,” says Rebecca Carland, Investment Director at Cambridge Associates and co-author of the report. “Of course, not every family or institution will pursue impact investments. But for those that do, the key to success is often a willingness to embrace change, and to do so within a well-defined framework of values and objectives.”
For more information, or to speak with Erin Harkless or Rebecca Carland, please contact Eric Mosher, Sommerfield Communications, Inc., at (212) 255-8386 / Eric@sommerfield.com.
About Cambridge Associates
Cambridge Associates is global investment firm founded in 1973 that builds customized investment portfolios for institutional investors and private clients around the world. Working alongside its early clients, among them several leading universities, the firm pioneered the strategy of high equity orientation and broad diversification, which since the 1980s has been a primary driver of performance for these leading fiduciary investors. Cambridge Associates serves over 1,000 global investors – primarily foundations and endowments, pensions and family offices – and delivers a range of services, including outsourced investment (OCIO) solutions, traditional consulting services, and access to research and tools across global asset classes. Cambridge Associates has more than 1,200 employees – including over 150 research staff – serving its client base globally. The firm maintains offices in Arlington, VA; Boston; Dallas; Menlo Park and San Francisco, CA; London; Singapore; Sydney; and Beijing. Cambridge Associates consists of five global investment consulting affiliates that are all under common ownership and control. For more information about Cambridge Associates, please visit www.cambridgeassociates.com.