Why Family Offices Are Moving Beyond ESG to Impact Investing & How to Make the Move

Global environmental, social, and governance (ESG) funds have roughly $3 trillion in total assets, according to Morningstar data. Most of these funds exclude investments in non-ESG businesses, such as oil and gas companies or weapons manufacturers—others weight companies based on their emissions, board representation, or other factors.

Unfortunately, these ‘exclusionary’ strategies don’t necessarily achieve positive ESG outcomes. For instance, ESG trends encouraged many oil and gas companies to divest dirty assets to private equity companies that don’t have strict reporting requirements. As a result, these oil and gas projects could do more harm than before.

Impact investments go beyond avoiding harmful investments to actively seek out investments to solve specific problems like climate change or social injustice. For example, an impact investor might invest in a portfolio of solar fields across the U.S. to promote the transition to renewable energy or affordable housing developments to address inequality.

Impact investments are an excellent fit for family offices—and vice versa. Family offices are always looking for ways to achieve philanthropic outcomes while earning a positive return. At the same time, impact investment managers may not want to deal with the high costs of managing public shareholders or raising capital via Reg A offerings.

A notable downside of impact investments for the $6 trillion family office market is the relatively small size of the market. Currently, impact investing remains just a $715 billion industry, according to the GIIN. As a result, there could be more demand than supply when sourcing projects and generating compelling returns.

Another challenge is defining key performance indicators (KPIs). While financial returns are straightforward, assessing the impact of an investment is much more challenging. For example, some asset managers may want ‘additionality’ or to provide an impact that wouldn’t have occurred otherwise. But proving such additionality is a challenge.

Impact investments come in all shapes and sizes. For instance, Climate Bonds Market Intelligence believes that green bond issuances will rise from $517 billion in 2021 to $5 trillion by 2025, providing family offices with significant depth. A growing number of governments issue these bonds to finance climate-friendly projects.

ImpactAsset and other investment management firms provide family offices with access to high-impact deals, along with back-office administration, due diligence services, and custom portfolios. As a result, it’s much easier for family offices to source non-public deals without building project portfolios from scratch.

Be sure to check our Portfolio Management Channel to learn more about different portfolio rebalancing strategies.

Family offices are constantly looking to achieve both financial and non-financial outcomes. While ESG investing has been the most popular vehicle for sustainable investments, impact investing has become an increasingly attractive way to achieve better non-financial results by targeting KPIs like additionality.

Make sure to visit our News section to catch up with the latest news about income investing.