William Huston, AIF®, AIFA®

Family Offices, ESG and Impact Investing

William Huston, AIF®, AIFA®

William Huston, AIF®, AIFA®

Family Offices, ESG and Impact Investing

High net worth individuals and families regularly seek to preserve their wealth as well as to demonstrate their values. But these two motivations are often carried out using different vehicles. Wealth preservation is usually done through investing, and values are usually expressed through philanthropy.

An ESG compliant landscape

However, according to a Global Impact Investing Network's report, cultural conscienhttps://cdn.sanity.io/images/eydex0le/production/1e4f5105984d3e8336fbe5d5c91043508b5a9a96-1125x750.webp?format=webp&w=500&h=500ce has been awakened in recent years, and efforts continue to grow among institutional investors and family offices to integrate their values and their investments into one another. Family offices are increasingly focused on environmental, social, and governance (ESG) issues and impact investing.

growing ESG investments

Understanding ESG and impacting investing is key to integrating them into the operation of family offices. The rest of this article lays out key concepts in ESG and impact investing.

If you're interested in outsourced family office services and seeking for a firm with an ESG and impact investing ecosystem, Bay Street Capital Holdings is a leading provider you can work with.

Key Takeaways
  • ESG and impact investments are forms of sustainable investments
  • ESG investing can be seen more as a framework or scorecard-based investing which rules out non-compliant organizations from funding opportunities
  • Impact investing funds innovative solutions to perceived ESG challenges
  • An ESG investment may not pass as an impact investment but all impact funds are ESG compliant
  • Family offices may focus on impact investments since it integrates ESG values

The contents of this article are for educational purposes only. They are not intended to serve as a source of professional financial advice. Experts on financial planning or wealth management can be reached here. More on disclaimers here.

ESG Investing

ESG stands for Environmental, Social, and Governance. ESG investing is an approach to sustainable investing that considers non-financial factors alongside traditional financial analysis when evaluating investment opportunities.

The goal of ESG investing is to integrate environmental, social, and governance considerations into investment decision-making in order to manage risk and achieve sustainable long-term financial returns.

An ESG environment

Environmental factors in ESG include a company's impact on the environment, such as its carbon footprint, use of natural resources and waste management practices. Social factors encompass a company's impact on society, including labor practices, employee relations, community engagement and human rights. Governance factors refer to a company's management and decision-making structure, including board diversity, executive compensation and shareholder rights.

Investors use ESG criteria to evaluate companies, funds, and other investment opportunities, with the aim of identifying those that demonstrate strong environmental, social, and governance practices.

Why ESG is Important for Family Offices

Beyond growing and preserving wealth, family offices are often established to perpetuate legacies. In light of this, managers of family offices should strongly consider adopting ESG goals since achieving these goals will be more beneficial for legacy.

growing investments

Moreover, empirical research suggests that ESG adoption can lead to better performance with investments, and this serves the bottom line of wealth building.

One reason ESG adoption leads to better performance in family offices and their investments is because it attracts top talent among the younger generation, who are more aspirational and have a lot to offer. Private equity funds have a few examples of this.

Examples of Family Offices Impact Investing

Here are a few examples of family offices leading the way in impact investing.

Blue Haven Initiative

Blue Haven Initiative focuses on investing in companies and organizations that are working to address social and environmental challenges, such as clean energy, sustainable agriculture, and access to healthcare.

KL Felicitas Foundation

The KL Felicitas Foundation is committed to impact investing, and has shifted 100% of its portfolio into impact investments. The foundation focuses on investing in social enterprises and funds that are working to address issues such as poverty, healthcare, and education.

Imprint Capital

Imprint Capital is a family office that works with high-net-worth families and institutions to design and manage impact-focused investment portfolios. Imprint Capital focuses on investing in sectors such as sustainable food and agriculture, renewable energy, and healthcare.

Caprock Group

Caprock Group works with families and foundations to design customized investment strategies that align with their values and goals. Caprock Group's impact investing portfolio includes investments in areas such as sustainable agriculture, renewable energy, and affordable housing.

ESG is becoming increasingly popular, and family offices are taking note of its potential relevance to their mission and function. However, the reasons for their interest may differ from those of other private market investors.

Whereas asset managers and private equity firms may experience demands to establish ESG policies and reporting in order to maintain their portfolio, family offices are not obligated or motivated by investor expectations or directives.

A family office ESG meeting

In late October 2020, the U.S. Department of Labor issued a new regulation that potentially restricts or removes socially responsible investing from retirement plans. This decision may have a notable effect on funds and investments that fall under the ESG and socially responsible investing categories but none on family offices.

Is ESG Considered Impact Investing?

Many confuse ESG with impact investing and use both interchangeably. However, these constructs developed separately and are sustained by slightly different drivers.

Innovative impact ideas put on paper

Although ESG and impact investing overlap in many ways, they also have important differences. ESG is a metric for evaluating public institutions particularly on their past performance, while impact investing actively seeks solutions to social and environmental challenges by investing in innovative solutions.

Impact Investing

Impact investing refers to investments made with the intention of generating a measurable social or environmental impact, in addition to a financial return. The primary goal of impact investing is to create positive social and environmental change, while still generating financial returns that are competitive with traditional investments.

an idea of impact

Impact investors may invest in a range of asset classes, including private equity, venture capital, debt, real estate, and public equity. The investments may target specific impact themes, such as renewable energy, sustainable agriculture, affordable housing, or access to education and healthcare.

An ESG landscape

One key feature of impact investing is the use of rigorous metrics and evaluation tools to measure and track the social and environmental impact of the investments. These metrics can include factors such as carbon emissions reduction, poverty reduction, job creation, access to education or healthcare, or improved environmental sustainability.

Evolution and Landscape of Impact Investing

Over the past decades, impact investing has evolved significantly and some of the key milestones in its evolution include the development of impact measurement and management tools, emergence of impact-focused financial products, and mainstreaming of impact investing.

growing investments

Also, as of January 2022, Actis, TPG, Medium Infrastructure, Tikehau Capital, and KKR are the top five impact investing firms based on their assets under management. In the past, Triodos Investment Management, The Reinvestment Fund, BlueOrchard Finance S.A., and Community Reinvestment Fund, USA were also among the top firms.

Difference between ESG and Impacting Investing

ESG and impact investing are both types of sustainable investing, but they differ in their goals and approaches.

An imbalanced weight measure

ESG investing considers environmental, social, and governance factors when evaluating investment opportunities. Companies are evaluated based on their performance in areas such as environmental impact, labor practices, executive compensation, board diversity, and other non-financial factors.

The goal of ESG investing is to integrate these considerations into investment decisions in order to manage risk and achieve sustainable long-term financial returns.

growth of an ESG loving investment

In contrast, impact investing is a strategy that seeks to generate a measurable, positive social or environmental impact alongside financial returns. Impact investors intentionally direct capital to businesses, organizations, and funds that aim to create positive social or environmental outcomes, such as improving public health, reducing carbon emissions, or addressing social inequality.

growing ESG idea

The objective of impact investing is to generate both financial and social or environmental benefits, often targeting specific issues or underserved communities. Hence, it must be clear to you as an investor that ESG is not the same as impact investing, and while all impact investments are ESG compliant, not all ESG investments are impact oriented.

Current Concerns of Family Offices

Some of the current concerns of family offices regarding ESG and impact investing include:

  1. Identifying reliable and relevant ESG data: Family offices are concerned with accessing reliable and relevant ESG data to help them make informed investment decisions.

  2. Ensuring investment alignment with ESG principles: Family offices are also concerned with ensuring that their investments align with their ESG principles and values, and that their investments have a positive impact on society and the environment.

  3. Measuring impact: Family offices are looking for ways to measure the impact of their investments on ESG issues, and are interested in developing metrics and frameworks to help them track their progress.

  4. Managing risk: Family offices are aware that ESG factors can create risks to their investments, and are looking for ways to mitigate these risks and ensure that their investments are sustainable over the long term.

  5. ** Finding high-quality ESG and impact investments:** Family offices are also concerned with finding high-quality ESG and impact investments that meet their financial and impact objectives, and that are aligned with their investment strategy.

  6. Ensuring transparency and accountability:* Family offices are concerned with ensuring that companies they invest in are transparent about their ESG practices and are held accountable for their impact on society and the environment.

Overall, family offices are increasingly focused on ESG and impact investing, and are seeking ways to align their investments with their values and have a positive impact on society and the environment.

Why Family Offices Should Emphasize Impact Investing

Incorporating the past into the future is nearly impossible. The only means to do this is by taking account of past actions and allowing it to inform decisions that will affect the future.

With ESG goals tending towards passivity and focusing on past actions and consequences, Family offices should focus on and emphasize impact investing which not only takes ESG findings into account but is more forward looking and proactive.

A man considering investing in ESG

For example, using an ESG metric might rule out companies with high greenhouse gas emissions from investment considerations. However, impact investing will channel funds into companies and start-ups that are working on solutions for reducing emissions. This means that, all impact investors integrate ESG factors into their investment process.

More importantly, family office clients tend to have more sway over their portfolio and can push for an impact focus within companies and start-ups they invest in.

Easy Steps for Impact Investing

A family office can pursue impact investing or an impact management project by simple steps of researching, investing, and evaluating. Evaluating after investing helps to identify key performance indicators that can guide future investing.

If your family office seeks to partner with another firm with experience in ESG and impact investing, reach out to the team at Bay Street Capital Holdings.

Bay Street Capital Holdings

Logo - Bay Street Capital Holdings

Bay Street Capital Holdings is a Black-owned, independent financial planning, wealth management, and investment advisory firm located in Palo Alto, CA. The firm's primary focus is on managing total risk and volatility, with the aim of preserving and increasing total assets and income, rather than solely maximizing returns like many other advisors.

Founder William Huston has over 13 years of experience in supporting the largest retirement plan in the United States, the Thrift Savings Plan with assets worth $650B, and has been recognized by Investopedia as one of the Top 100 Financial Advisors for 2022. Bay Street is the only Black-owned firm among the twenty recognized firms in California.

Bay Street was established to support diverse and emerging fund managers and entrepreneurs, with a goal of advocating for their needs. Ekenna Anya-Gafu CFP, AAMS, based in Scottsdale, Arizona, is a recognized member of Bay Street for his excellent communication, helpfulness, attention to detail, and responsiveness.

Bay Street Capital Holdings was also a finalist in the Asset Manager for Corporate Social Responsibility category among more than 900 firms throughout the United States in 2021. As of now, Bay Street manages $480 million in assets.








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