What is social impact investing? Is it reliable? Should you use it? Basically social impact investing is an investment strategy and a tactic to address pressing social and environmental challenges.

Impact investing uses a range of approaches that vary based by personal goals. Some investors look at their current profile and make adjustments, while others proactively build their portfolio with impact in mind. And some investors seek high returns, yet others seek investments to make the most impact toward their cause.

Like all good investing, impact starts with the investment rigor of understanding what that vehicle will do for your portfolio, and then adds in some non-traditional variables as well. Looking at the values- driven investing spectrum, there are three basic buckets of impact investing:

SRI – socially responsible investing, which is filtering or screening current holdings and removing what you don’t want in your portfolio.

ESG – Explicit inclusion of Environment, Social or Governance risks and opportunities in your portfolio.

Impact investing – Looking for both social and financial return on your investments.

To be clear, impact investing has a strong and relevant history. As of the end of 2018, $12 trillion assets in the US alone are managed under a sustainable investing strategy. And by the end of 2019, over 1500 organizations manage $715 billion (USD) in impact investing.

Despite its growth, impact investing remains a widely misunderstood concept with a few myths to overcome:

Myth #1 – Impact investments require a financial trade off. In reality studies show an overwhelming majority of impact investors report meeting or exceeding both their impact expectations and their financial expectations. Investors don’t have to sacrifice returns to make an impact.

Myth #2 – You have to take big risk. Yet research shows about the same amount of risk as non-impact investing. And often the opportunities of impact investing mitigate the risk. Impact investments run the gamut of asset classes and many are fully insured such as FDIC or NCUA 100% impact cash deposits. There are also loan funds that provide capital preservation opportunities.

Myth #3 – Impact investing is too complicated. While impact investing can feel daunting, there are simple ways to get started:

1.  Move your cash into an impact deposit account;
2.  Apply ESG preferences to your portfolio;
3.  Filter for SRI; or
4.  Start small with community lending capital preservation opportunities.

Myth #4 – You can’t measure the impact. There are in fact codified and widely applied impact investment frameworks, which lend to the legitimacy of the market and strengthens the quality of impact achieved. With an increased emphasis on data collection and management, both impact and returns can be measured.

When looking at impact investing and the family office, where investments often represent family values and the desire to leave a legacy, the next generation is advocating for impact investing in causes they care about. Many family offices say – I’m ready to “dip my toe in,” I care deeply about my cause, and ask, how can I reflect that in my portfolio? At the least, start the conversation with your advisor you will likely be surprised by how simple it can be.

Interestingly, the shifting wealth dynamics in family offices continues to drive demand for impact investing:

•  $58.7 trillion of wealth will transfer primarily to women and millennials over the next 30 years.
•  Over 70% of women show an interest in socially responsible and impact investing.
•  45% of wealthy millennials want to use their funds to help others and consider SRI a factor in making investment decisions.

We also see a few specific friction points specifically for family offices in impact investing. For one, there can be a reluctance to change because whatever the family has been doing from an investment perspective is working, so why change things when they have been successful. Also advisors and families see a varied level of interest and understanding across generations. Family assets are often jointly invested, so it can be difficult to try something different for just one individual. A hired, objective professional, such as a CIO, can help families with these complex decisions.

Bill Sullivan is the president of Family Office Exchange (FOX). He is a thought leader who understands the role that disruption and innovation will play in transforming our industry. He leads FOX in helping members to understand and plan for future transitions in the family enterprise, the family business, and the family office. Areas of Expertise: Enterprise Families, Disruption, and Innovation Read More →