How impact investing addresses the needs of HNWI and family offices
Philanthropy is not a new interest for HNWI and family offices. Many of them have being involved in charity, donation or sponsoring for a long time. Nevertheless, it appears that today philanthropy has evolved far beyond occasional donations to charities and is now full part of the financial strategy.
HNWI and family offices increasingly and almost systematically adopt a philanthropic dimension in their discussions with their financial advisors. Babyboomers already showed interest for social and responsible projects but they did not associated it to their investment strategy. The GenX and especially the GenY HNWI – a.k.a the Millenials – are calling for innovative strategies that make financial performance converge with their values.
Impact investing, a new investment approach
Financial investments and philanthropy seem to pursue different objectives. When financial investment is expected to grow wealth, philanthropy supports social, humanitarian or artistic projects without expecting any financial return-on-investment. This obvious incompatibility finds a solution with impact investing.
Impact investing consists in investing in companies, organisations or funds with the ambition to generate positive social and financial ROI. HNWI and families seeking to add sense to their investments strategies adopt impact investing. Thus, the development, the protection and the continuity of their wealth is ensured in agreement with the values of their family. We can see that today, family offices are clearly early adopters of impact investing strategies. In 2014, the World Economic Forum led a survey on impact investing and family offices. It reported that this population is a driver of change that will progressively extend to other HNW populations.
Impact investing : the Millenials challenge
The spread of impact investing seems to closely depend on the new generation of HNWI (18-34 years old)
They equally seek financial and social performance. Far more than their elders, this population is looking to take part in the improvement of society and to make a difference. A study commissioned by Bank of the West shows that Millenials take investment decisions meeting their environmental, social and political values. This new investment attitude unveils a quest of sense and the desire to create additional value, beyond financial accumulation. This reports reveals that 80% of HNWMI (High Net Worth Millenial Individuals) use impact investing with energy, agriculture and environment as main concerns.
“GenY has reached its maximum level of activity and of expenses. Their impacts on philanthropy is huge. Their approach is highly influenced by the fact that they have grown up in a period of fast technological innovation, of globalisation and of economic instability.”
– Julie Shafer, Head of Strategic Philanthropy & Purpose Investing, Bank of the West
According to the Global Impact Investing Network, impact investing represented about 60 billion dollars in 2015. This volume seems marginal compared to the total amount of assets under management worldwide, however JP Morgan predicts that it will reach one trillion dollars within 2020. The transfer of wealth between Millenials and their parents (in around 2 to 3 decades) will definitely make the demand for impact investing explode. Experts forecast that between 30 to 59 trillion dollars will be held by HNWMI. This trend directly concerns family offices and independent asset managers.
Wealth managers as counsellours
Millenials don’t expect to be advised for their philanthropy decisions. They are confident about their choices and their values and they are actually looking to be accompanied in their project researches and in the elaboration of an investment strategy that matches their expectations. Wealth managers and financial advisors must now understand and address the needs, the habits and the investments expectations of this population.
Millenials are far from being naive or utopian investors. They are much more connected and informed than the previous generations. This represents a major upheaval in the financial services sector. This new generation of investors equally value financial performance and the social impact. In this context, new performance indicators must be created to assess the adequation of investment strategies to the client needs.