Family offices exist to help wealthy clients manage their resources, which means they’re often responsible for allocating philanthropic contributions. Considering the fact that these offices manage trillions of dollars in assets and the vast majority are engaged in philanthropy, their investments have an opportunity to make a powerful impact.
This is why it’s essential for family offices (and other wealth management professionals who advise philanthropic investors) to focus on building diverse portfolios that will ultimately support effective organizations that align with the investors’ values and mission – one of the key trends going into 2022. With that trend in mind, let’s take a look at a few of the top considerations for investors who are looking to maximize their impact.
What types of investments do you want to make?
While family offices are responsible for managing a range of investment vehicles, a World Economic Forum report found that 94 percent engage in philanthropy and impact investing. There are many ways investors can allocate their philanthropic dollars – from environmental, social, and governance (ESG) investments to direct grantmaking.
Program-related investments (PRIs) blend these approaches – they may generate a monetary return, but this can’t be their primary purpose. As the IRS explains, the key point is that PRIs “must significantly further the foundation’s exempt activities.”
Mission-related investments (MRIs) ensure that investors are making sustainable long-term investments which align with their values, account for companies’ ESG practices, and focus on addressing social problems. By making ESG considerations an integral part of investors’ portfolios, MRIs will continue to have a crucial role to play in helping them secure better investment outcomes and scale impact at the same time.
With all these mechanisms for philanthropy and socially responsible investing, it’s important to determine how each one fits in with your overall portfolio and mission.
Building and maintaining the right portfolio
What are your investment goals? Which causes and values matter most to you? What’s your risk tolerance? These are all fundamental questions that you have to ask if you want to maximize your impact as a philanthropic investor. Many investors want to meet financial and charitable goals simultaneously, and they’ve never had more tools to do so. As the WE Forum report explains: “Numerous studies refute a widely held belief that socially-conscious investors are settling for lower returns.”
Every investor is unique, which is why they should engage with financial and philanthropic advisors who can outline their options and recommend strategies based on their values and long-term goals.
Why diversification matters
The combination of philanthropic and investment goals is only going to become more common. At a time when 91 percent of companies say they have a responsibility to act on ESG issues, the opportunities to make socially responsible investments in the private sector are only going to increase. Meanwhile, the total value of grants made by donor-advised funds (DAFs) has surged in recent years – from under $16 billion in 2016 to more than $34 billion in 2020.
With so many investment options available, investors have ample opportunities to build diverse portfolios, which will allow them to mitigate risk, support a wide range of causes that reflect their values, and scale impact as much as possible.
Diversification matters for many reasons, from protecting downside risk and maximizing one’s upside in financial ROI to social reasons for investing in companies that are truly making an impact on improving our world for better racial equity, healthcare, education, environmental justice, and other reasons. A significant percentage of the global population remains impoverished and without basic needs met or supports and opportunities to flourish. Many for-profit and social enterprise organizations are tackling tough, systemic issues in order to better our communities and humankind, and they’re making investments in on-the-ground organizations and leaders who have the lived experience to solve the issues that will improve our lives and economies for all.
By assessing the entire landscape of investment classes and opportunities, and picking ones that provide a strong, combined financial and social return, we can all gain from the investment industry’s powerful presence in our global market.
Stay tuned for Trend #2 2022, coming next week…
