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Blog | Impact investing: how to start as a family office?

VP Capital, which, as a family office, is committed to making its investments more sustainable by investing in solutions with a positive impact on planetary and societal issues, conducted a survey of around 20 Flemish and Dutch family investment companies at its roundtable to find out what sustainability efforts they are currently making.

The survey showed that 69% of the family offices maintain an active dialogue around the theme of sustainability. The subject is thus on the agenda of wealthy families. However, only 33% have someone responsible for sustainability on the board and only 25% of the family offices surveyed have someone on the supervisory board with a sustainability profile. Most profiles in the board have today a legal or financial background. Luckily, we are noticing a growing tendency to add sustainability knowledge to teams and boards.

Family investment companies understand the importance of sustainability, but do not always succeed in making sustainability an important pillar within their investment strategy. Moreover, a study carried out by Deloitte shows that there is a disconnection between the expectations from family members regarding sustainability and the actual execution by the management.

For example, we see that sustainable investments are still too often only made with a portion of the profits from regular shareholdings instead of using the entire capital for this purpose. Investing a portion is an important first step, but should not prevent families from thinking about how they can use the entire capital for sustainable progress.

Fear of risk

The landscape of sustainable investments is changing rapidly, which makes it difficult to oversee the entire field and make informed decisions about what to invest in as a family.

Most innovations still have a whole life cycle to go through and family offices traditionally invest more in existing companies with proven results. Experience with screening innovations and valuations of start-ups is often not part of the core expertise of family offices.

In addition, many family offices are risk averse. Because the field is difficult to oversee and the products and services are often innovative, families often fear that the investments will not yield a sufficient return.

In conversations with families, we are hearing more and more Next Gen individuals who are thinking less from a risk perspective and more from the opportunities that exist to make their capital future-proof through impact investing: out of a sense of responsibility, because planetary and social problems are growing and because it makes economic sense to invest in innovations of the future. We see the younger generation increasingly opting for value aligned investments. This generation has also gained more self-confidence and courage to push for change in their family office, with their asset manager and with their companies.

Growing awareness and social change

Despite the reluctance of some family offices, VP Capital still recommends thinking about how family offices can make their capital more sustainable. "Both due to the next generations within families and external factors, family offices will have to move more and more toward sustainable investing," says Guus van Puijenbroek, Managing Director, VP Capital.

Why do we do this?

► Awareness of the future generation

A family office is often managed by different generations, with contrasting motivations. The youngest generation grew up in a very different world and their awareness and attention to global warming, social injustice, wars and the impact of our lives on the environment has never been greater. In addition, they have a critical attitude towards companies and expect companies to fulfill their planetary and societal responsibilities. A study by Deloitte shows that only 47% of millennials, young people born between 1981 and 1996, believe that companies have a positive impact on society.

Future generations therefore want change, and family offices will not - and must not - escape this trend. The younger generation has less desire to wait patiently for their time to start impact investing within the family investment company and often start their own initiatives outside the family office. Where the discussion used to be about the importance of digitalization, it is now about sustainability. It is important for the older generation to involve the younger generation in time with the investment policy that the family office wants to pursue.

 

► Society is watching

Society has become much more aware of its impact on the world in recent years. Recent events such as climate disasters, wars and the pandemic have challenged the way we live.

Pure profit as the sole motivation for a business is no longer appreciated, nor accepted. So the pressure for transparency and action comes not only from within, but also from society. So companies, financial institutions and funds should not ask themselves if they will be scrutinized, but instead, when.  The oligarchs of Russia are an excellent example of this. Where for years they got away with wrongdoing, the war in Ukraine is causing them to be held accountable for their misdeeds and to be punished for them as part of the social debate.

Transparent communication remains exciting for families, for many it is even still in its infancy. So it is not surprising that 69% of the families surveyed at the roundtable indicated that they would communicate less transparently than VP Capital.

 

► Legal obligation

New legislation requires companies to provide clarity on their sustainability efforts. As of March 2021, the Sustainable Finance Disclosure Regulation (SFDR) is in effect. This European regulation requires collective investment institutions to be transparent about how sustainable their investments are. Many family offices will also fall under the new Corporate Sustainability Reporting Directive (CSRD) and need to start preparing for this.

Communication and guidance

➡️ Start by talking

Everything starts with communication: dare to start the conversation with the family. With different generations and therefore different opinions, it is extremely important to keep the lines of communication open. Good communication also ensures a broader support base to keep everyone on board throughout the process.

Identify what is important to the family: which sectors, social or planetary issues are close to your heart and which are within your expertise? Dare to break old traditions and patterns and discuss them.

 

➡️ Get the right advise

No family office has all the knowledge in house to begin its sustainability trajectory alone. Be guided by experts in the field of communication, sustainability, compliance, impact, leadership or family dynamics; they bring in the missing knowledge and can inspire the family to find a new and sustainable course.

During the thought process, it is best to look for the extremes in the questions you ask: this will make it clear more quickly what the family members absolutely do or do not want, and will prevent you from getting stuck in a gray zone. In addition, try not to think too far ahead, but start planning for the short term. This does not mean that you should forget about the long-term goals, but by also formulating actions and objectives for the short term, you can achieve concrete results more quickly.

The end of the process is only the beginning: a sustainability project with impact requires adjustment and training.

Keep sustainability and impact top of mind by organizing activities with the entire family, make sure you have visual material that portrays your operation, invite speakers, follow training and look for places to connect with other impact investors. It is important to keep in mind that the journey must be supported and understood by the whole family.