The investment theme of the next decade may turn out to be setting aside financial rates of return and elevating return to society.
The ranks of maverick “impact-first” investors who are willing to forsake some financial performance as they put their capital to work for social impact is growing. As it becomes ever easier to invest with your values, bucking the ingrained norms of the investment community is becoming more popular.
No group is better positioned to infuse impact-first enterprises with the capital they need than private wealth holders. Campden Research estimates that some 7,300 family investment offices globally—each one typically with more than $100 million in assets—manage $5.9 trillion. It’s those wealthy individuals and families who have the most discretion to declare social or environmental impact a priority for some portion of their private investment portfolios.
In fact, wealthy individuals and families already invest with social good as a goal. Campden Researsch reports that private wealth holders will increase their average portfolio allocation for impact investing from 20% in 2019 to 35% by 2025.
The need has never been greater. The social and economic toll of COVID-19, plus heightened concerns about climate change, racial injustice, income inequality, and gender discrimination, have injected fresh urgency into the quest to direct capital to some of society’s biggest problems.
While most impact investors seek market-rate returns along with social good, impact-first investors are “willing to give up some financial return if they have to,” explains a Monitor Institute report. For instance, impact-first investors helped launch d.light’s home solar products business in developing nations and AeroFarms vertical indoor agriculture operations in the United States. Both businesses needed patient, risk-taking capital in the early days when traditional investors saw more risk that reward. Both have now graduated to more traditional forms of investment.
To date, only a tiny amount of private wealth flows to the impact-first investments. The Global Impact Investing Network pegs impact-first investing at only 7.5% of the $47 billion in new impact investments made in 2019.
While high-net-worth individuals are in the habit of making major donations to nonprofit institutions, their investment mindset is built on traditional practices focused on the primacy of growing wealth. The fund managers and investment advisers they hire are even more wedded to financial performance as a measure of success. Leaving financial returns on the table in the name of impact has not been a widely accepted strategy.
Breaking through this psychological barrier starts by recognizing impact-first investing as one more option on a returns continuum, where it sits between impact investing for market returns and philanthropy. Unlike philanthropy, impact-first investors expect a return, but accept less than market rate. Social and environmental impact supplant financial gain as the currency of success. It’s a different way of thinking about “total return.”
Once past this mental hurdle, getting started with impact-first investing has never been easier. Wealthy individuals and family offices can outsource to a growing number of funds, advisers, and intermediaries that have impact-first options. Jordan Park, Tiedemann Advisers, Align Impact and Avivar Capital, to name a few, provide families and institutions a range of wealth management and impact investing services, including access to impact-first opportunities.
Family offices can also build a lean team by adding a few specialists to their staffs and augment their portfolios with impact-first investments. It’s a practical first step for investors who want to make room for impact-first investing, but who don’t yet want to go all-in.
Other family offices, such as Omidyar Network, Ceniarth, Blue Haven Initiative, and Spring Point Partners, have built their own in-house teams. Bringing decision making in-house tightly links the investors’ values and goals with investment decisions. It also makes impact investing a central commitment, not a side bet.
To be sure, while impact-first investing is building momentum, there is a gap between aspiration and execution. Campden’s family office research found that 65% of family offices believe they have a role to play in alleviating economic inequality, yet only a tiny amount of their collective wealth currently flows to the impact-first investments purpose-built to alleviate poverty, disease, inequality, social injustice, environmental degradation, and more.
There’s never been a better or more urgent time to close that gap.
Michael Etzel is a partner in The Bridgespan Group’s Boston office, where Mariah Collins is a manager. The Bridgespan Group is a social impact consultant and advisor to nonprofits and NGOs, philanthropists, and investors. Matt Bannick is the former managing partner of the Omidyar Network and a Bridgespan Fellow. They are co-authors of “Back to the Frontier: Investing that Puts Impact First.”