Canada

In May 2016, the BNY Mellon Wealth Management Family Office Client Advisory Council met to discuss and debate social finance investing for family offices. The session included clients and outside experts who shared their knowledge of the most recent trends, best practices, and challenges that family offices face when investing in social finance. This paper is drawn from the observations and recommendations of the panelists.

Doing Well by Doing Good

Millennials and ultra-high net worth individuals (U-HNW) are increasingly seeking to connect with and positively change their communities through investing, and the way capital is currently deployed can no longer support this need. Philanthropy and government aid is not enough to solve the world's intractable social and environmental issues. Capital markets are viewed with skepticism, and investors often have a myopic focus on quarterly returns, as opposed to long-term value creation.

Impact investing, a subset of social finance, represents a paradigm shift, allocating capital for measurable social and environmental impact while still seeking financial returns. It focuses on maximizing stakeholder value rather than concentrating exclusively on shareholder value — in essence, to “do well by doing good."

In Canada, socially responsible investing (SRI) accounts for $1.5 trillion of assets under management, growing 49% between 2013 and 2015.1 The vast majority of responsible assets are invested in the public markets through SRI and environmental, social and governance (ESG) strategies.

Impact investing, which typically focuses on investments in private enterprises and funds, represents just $60 billion worldwide. Impact ventures focus on job creation, financial inclusion, sustainable agriculture, health, education, housing, energy, water and sanitation.

“Doing well by doing good" has resonated across several investor segments, but perhaps none more than family offices. Family offices are in a unique position. They have achieved significant wealth and are more concerned with preserving and allocating capital with very specific, mature goals, including legacy planning and foundation management, which is how family offices have expressed their philanthropic goals historically.

The Family Office Client Advisory Council panel included several industry consultants, each representing a different area of expertise: institutional investing, social finance, impact investing and environmentally focused investing. They were joined by an experienced group of family office investment professionals from some of the most well-known families in the U.S.

Here's what they told us:

Here's what they told us:

Social Finance Investing Is Still Maturing

Lack of awareness and institutional acceptance of social finance is keeping it from becoming a mainstream investment theme.

In particular, the inability to reconcile the value of social finance allocations with capital market theory has presented the most serious obstacle. It's not clear that the performance premia argument still holds, as impact and mission-based investing have become the favoured investment approaches for family offices. These approaches allow investors to target interests that are important to the family — taking on concentration risk while forgoing diversification opportunities.

It's Difficult to Demonstrate the Value of Social Finance Investing

A lack of cohesion and uniformity around the multiple platforms and services that are used to measure the social and financial benefits of impact investing has made it difficult to demonstrate the strategy's quantitative value.

Common metrics must be established and adopted across the social finance sector. They should be simple, concise and easily understandable in order to make it attractive for new businesses to focus on impact.

Additionally, it was said that there needs to be a way to demonstrate the value of social finance allocations on their own, as well as within the broader context of the investor's portfolio.

Social Finance Appeals to Different Demographics for Different Reasons

Millennials are driven by a desire to “do good" or “make a difference," and they are more likely to think globally. U-HNW investors are seeking to enhance their legacy.

Some Social Finance Sub-Asset Classes May Increase Portfolio Risk

As impact investing is primarily done through direct investment into private companies, investors must be aware of the potential liquidity risk involved. The research and due diligence necessary is identical to the venture capital framework, and requires a commitment and depth of knowledge to be successful.

Best Practices for Family Offices

The panelists shared five steps to consider when determining how to integrate social finance into family offices.

1. Set a Clear Mission

A clear, stated mission helps a family coalesce around a shared set of philanthropic goals. It allows the family to express its responsibility to society and its plans for giving back to the community. It may also enable individual family members to support their own chosen causes. One client told us that his family revised their foundation's bylaws to allow different branches of the family to support their own areas of interest, provided the foundation's overall mission was met.

2. Establish a Well-Defined Decision-Making Process

Designating who will be involved in the decision-making process and assigning appropriate roles to those individuals can help minimize conflict within the family. That way, everyone can stay focused on the family's long-term philanthropic goals. When adopting a process, it's important to consider how flexible or restrictive it should be.

Example: A family preferred a collaborative philanthropic approach, but realized that as future generations married and had children of their own, differences among the family members were sure to arise. With this in mind, they established a grant-making structure in which the entire family must unanimously approve half of the foundation's annual giving. The remaining half would be divided among the individual branches of the family, each of which would determine the allocation for their portion.

By incorporating a reasonable amount of flexibility, the family ensured that their foundation could evolve to meet changing needs over many generations.

3. Engage in Deep and Open Dialogue Across Generations

Lack of communication is often at the root of failed family enterprises. It can be particularly challenging when trying to reach consensus across multiple generations. Longer life expectancies mean that families could have as many as four generations at the table.

Example: With its fourth generation now approaching adulthood, a family is benefiting from a very proactive approach to managing familial communication, using both formal and informal avenues of gathering feedback. Before each board meeting, the designated leaders of the foundation speak one-on-one with every stakeholder, giving them an opportunity to express opinions and have their voices heard. These preliminary conversations reduce discord at the actual meeting and often take discussions into new and exciting philanthropic areas. The family arranges for more formal feedback as well, inviting representatives from every adult generation to participate when the family's philanthropy is discussed. Finally, family members are actively encouraged to share their thoughts with foundation leaders at any time via phone, email, or text messages. Feedback is valuable, but a deeper level of participation is also valuable. The family sees philanthropy as an important means to engage upcoming generations as they mature. Experienced family members actively involve children and grandchildren in selecting charitable recipients, which gives younger family members an important sense of ownership and responsibility.

4. Respect Personal Passions

We all know that being part of a family means accepting that our parents, siblings and cousins have very different personalities and quite an array of likes and dislikes. As families grow, the range of opinions becomes ever more diverse. A family foundation tends to be most effective when it helps members find their own passions rather than forcing them into the founder's shoes, which for many family members can seem too big to fill.

5. Be Receptive to Outside Expertise

Philanthropy is complicated. For a family to achieve its philanthropic objectives, they need the aid of experts in the areas of trust and tax law, as well as in matters related to potential grand recipients. Some families choose professionals to run their foundation, in an effort to minimize conflicts between family members. The family still makes the ultimate decisions about annual giving, but the presence of a non-family administrator helps to defuse conflict and minimize concerns that one branch of the family may have more control than another.

Measuring Success

Few vendors have developed standardized metrics and valuation services that can be used in conjunction with standard portfolio metrics to demonstrate the value of a social finance investment program.

Morningstar, ISIR, and Rockefeller were mentioned as leaders in this space, however, these solutions have not yet been standardized into portfolio measurement processes. IRIS, PULSE, and GIIRS are tools that can be used to assess social finance allocations, but they do not easily reconcile to traditional portfolio metrics and are not commonly utilized by the investment industry.

  • PULSE helps track and benchmark financial, operational, environmental and social data to better demonstrate impact
  • IRIS provides a set of standardized terms that govern the way companies and investors define their social and environmental performance
  • GIIRS is an impact-ratings tool and analytics platform that assesses companies and funds on the basis of their social and environmental performance. It is based on IRIS definitions, and generates data that feeds industry benchmark reports

The panelists could not identify any universally accepted metrics. This was largely because:

  • Each family office self-defined their investment program
  • Capital-allocation decisions were driven by emotions, and not the family investment mandate
  • Success metrics were often time “soft" and not consistent with generally accepted investment practices

Conclusion

Social finance has become an increasingly important topic in the family office community as family members seek to use their investments to make a positive contribution to their personal causes. Often these choices do not fit traditional investment objectives, which makes it difficult to standardize the research, measurement and monitoring of these investments and incorporate them into mainstream investment processes. Though the social finance community actively promotes the virtues of this style of investing, it will struggle to find acceptance within the mainstream community until it can be rationalized from a CAPM (Capital Asset Pricing Model) or MPT (Modern Portfolio Theory) perspective.

At BNY Mellon Wealth Management, the dedicated family office team has helped many families with their investment needs. For more information, please contact your investment counsellor.

Resources

To learn more about Social Finance, our experts provided a list of resources that may be helpful as family office executives, and the families they serve, collaborate to develop the right social finance strategy that meets their needs.

  • Council on Foundations – A non-profit leadership association of grant-making foundations and corporations. www.cof.org
  • National Center for Family Philanthropy – A national non-profit that provides philanthropy resources, expertise and support to families. https://www.ncfp.org
  • 21/64 – A non-profit consulting practice specializing in next generation and multigenerational engagement in philanthropy and family enterprise. www.2164.net
  • Guidestar – Provides information to philanthropists and non-profits to advance transparency and enable users to make better decisions. www.guidestar.org
  • Foundation Center – Strengthens the non-profit sector by advancing knowledge about US philanthropy. www.foundationcenter.org
  • Chronicle of Philanthropy – A print and online news source for foundation leaders, fundraisers, grantmakers, etc. www.philanthropy.com
  • Exponent Philanthropy – A membership-based organization that provides resources and connections for small-staffed foundations, philanthropic families, and individual donors. (formerly Association of Small Foundations): www.exponentphilanthropy.org

Recommended Reading

The Art of Giving: Where the Soul Meets a Business Plan, by Charles Bronfman & Jeffrey R. Solomon

Philanthropy Heirs & Values, by Roy O. Willams and Vic Preisser

Inspired Philanthropy, by Tracy Gary with Nancy Adess

Stewardship Principles for Family Foundations, by Council on Foundations

Family Office Exchange's Recommended Philanthropy Book List: https://www.familyoffice.com/fox-recommended-reading-list/philanthropy-books

Five Books That Should Be in Every Donor's Library: http://www.philanthropyroundtable.org/topic/excellence_in_philanthropy/five_books_that_should_be_in_every_donors_library

1Responsible Investment Association, "2015 Canadian Responsible Investment Trends Report"

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