Family offices are giving back to society through a mix of impact investing and philanthropy, as they try to balance environmental, societal and governance (ESG) objectives with investment returns.
Difficulties in measuring performance and impact, as well as some social enterprises' need for an extra push, are among the reasons why family offices are using philanthropy alongside their impact investments.
While ESG-integrated portfolios have proven to produce equal or better returns than non-ESG benchmarks, impact investing performance has been less promising. A median impact fund had an internal rate of return (IRR) of 6.4% compared with 7.4% for the median non-impact fund, according to a University of California study.
It is also the least popular form of sustainable investing among family offices. Globally, only 25% said they preferred impact investing, with Asia Pacific numbers not too far off at 29%, according to the 2021 UBS Global Family Offices Report.
ESG-integrated investments were the most popular type of sustainable investment in Asia Pacific with 43% of family offices preferring the method, according to the report.
“It can be difficult to measure returns from impact investing… It’s like investing in a startup – a lot of it falls on the founder,” Elsa Pau, founder of ESG data aggregator BlueOnion and who counts family offices as clients, told AsianInvestor.
She added that it is not only performance, but also the ESG impact of your investment that can be difficult to measure.
“For investors, it’s a lot to handle. [In some cases,] it’s better to make it philanthropy,” she said.
In the 2020 edition of the UBS report, 38% of family offices said that a barrier to them engaging in sustainable investments is that they prefer to maximise returns and get involved in philanthropic initiatives instead – a jump from 10% a year earlier. Comparable numbers were not published in the 2021 report.
“Let’s be pragmatic about it,” one Singaporean family member was quoted as saying in the 2020 report. “If you’re here to change the world, just use the [philanthropic] foundation where there’s no need to make a return. That’s the right approach for me, though I know I’m in the minority.”
Three-quarters of family offices engage in philanthropy, according to a World Economic Forum report.
A UNIQUE BLEND
For Jennifer Cheng, who runs NewChic Capital, the venture capital (VC) and private equity (PE) arm of her family’s office, she prefers to do a blend of both impact investing and philanthropy.
Along with her portfolio manager Vivian Wang, she recently started up Ace Investment Management, a hedge fund that manages external funds from private ultra-high net-worth individuals (UHNWI), family offices and institutions.
“Ace Investment Management doesn’t just accept any LP (Limited Partner) who approaches us,” Cheng told AsianInvestor. “We don’t invest in companies that only care about the bottom line; we invest in those looking to improve the world for the better.”
“Similarly, we look for investors and firms with similar values, to us —values like integrity, empowerment of women and inclusivity, commitment to impact; and wanting to support companies in the same vein,” she added.
Some of the companies they have invested in include ESG risk analysis startup Climate X, and Green Common and Omnipork, which are dedicated to plant-based substitutes.
At the same time, they are engaged in philanthropic initiatives with non-profit organisations such as Teen’s Key, The Women’s Foundation, Cancer Fund and Habitat for Humanity.
"We do both impact investing and philanthropy because we believe that you need to have both and that it’s not just about long-term investing; we can’t just teach the fisherman to fish, sometimes we need to give them some fish to tide them over in the short-term,” Cheng said.
DON'T GET ATTACHED
Wang also views impact investing like any other type of deal. “When it comes to impact investing and any kind of investing, earlier can be riskier but also brings higher reward,” she told AsianInvestor.
“Some earlier bets may need babysitting and handholding but in the long run, if the fundamentals are solid, the leadership team and culture is strong, and the business model and other factors we consider are there, then it ultimately pays off," she added.
While some might think that it could be difficult to let go of impact investments that the investor is passionate about, Wang believes a clear line must be drawn.
“I never fall in love with the company. We have to be rational. Therefore we always look at the impact, the investment opportunity at hand, the business model, the fundamentals, and other factors at play – all separately as well as together. And we keep a logical head when evaluating each factor in our internal scorecard.”
And just as with any portfolio, not every investment produces the results you anticipate. But "that's how portfolio management works," Wang said.
"The very definition of portfolio management is that you need to diversify and hedge. And you need to know when to leave, or exit, or take the winnings. With equity, liquidity is not usually a problem. However, you do need to know when to call it."
According to the 2021 UBS report, 36% of family offices in Asia Pacific preferred exclusion-based investments.
However, issues have been raised about negative screening, for instance that it has become a tactic for investors to divert the public attention towards the sectors they exclude and away from “brown” sectors that they do invest in.
For instance, one single-family office portfolio manager told AsianInvestor that his firm has exclusion policies for gambling and tobacco, but he has also eyed airline equities in recent weeks as the sector is poised for a post-pandemic recovery.
The aviation industry produces 2% of all human-induced carbon dioxide emissions and contributes to 5% of global warming.
Complete divestment in geographies such as emerging markets also come with societal repercussions. For instance, a developing country that relies heavily on coal for power will have severe energy shortages if investors pull out large amounts of capital in the coal industry.