In my last blog, I wrote about how families and foundations involved in philanthropy historically assumed their assets would be invested to produce a return and their foundation grants would be allocated to have an impact.  Today, impact investing blends the two in an attempt to achieve a “double or triple bottom line” return that benefits both endowments and social good.

As described by the Global Impact Investing Network:

Impact investments aim to solve social or environmental challenges while generating financial profit. Impact investing includes investments that range from producing a return of principal capital (capital preservation) to offering market- rate or even market-beating financial returns. Although impact investing could be categorized as a type of “socially responsible investing,” it contrasts with negative screening, which focuses primarily on avoiding investments in “bad” or “harmful” companies. Impact investors actively seek to place capital in businesses and funds that can harness the positive power of enterprise.

 

Whether driven by values to accomplish this end or the downturn in the economy, families are considering impact investing to a greater extent.  Post 2008, when endowments were materially diminished, the world of philanthropy is no longer relying on traditional grant making to achieve an impact and boards are utilizing tools often left to their investment committees.  These forms of impact investing can include loans, bank guarantees, shareholder advocacy, pooled investments and so on to leverage a foundation’s impact.

In a recent study conducted by 21/64 and the Johnson Center for Philanthropy Next Gen Donors: Respecting Legacy, Revolutionizing Philanthropy entitled, , we discovered that 21 to 40-year-olds from high-capacity families embrace using new tools such as impact investing to achieve philanthropic impact.  A 20-something woman we interviewed described how she searched for ways to combine social and financial value.  “[My family's foundation is moving] into the mission related investing and impact investing space. I think my generation doesn’t think you need to sacrifice positive social impact for earning return on investment. Those two things don’t just coexist together but are actually inherently aligned, and that is ideally way the world should work, that I should be adding both social value and financial value to me and everyone else.”

Another next gen donor we spoke with, whose grandfather started a well-known financial institution, conveyed: “I think that implementation of impact investing is not a matter of if, but when. On the issues we care about, we want to use our full ability to leverage the change we want to see and, in a lot of ways, expect.”

The blending of philanthropy and investing that next generation donors are expecting is starting to require families to broaden their view of their mission and values.  Before these recent shifts in the way families think about aligning mission with asset allocation, it would have been difficult for families to see that their values could be the same whether applied to businesses, investments or philanthropic endeavors. 

We see this illustrated in governance changes that families are making to accomplish these aims.  Families are pursuing their philanthropic interests by adding impact investing to their previous investment strategy.  Next generation family members are being invited into the meetings and encouraged to actively think about and participate in investing as a change vehicle.  Other investment committees we’ve seen are expanding to include those professionals who are responsible for the family’s philanthropic endeavors; and, we see a member of the investment committee populating the grants committee ensuring connectivity. 

Another family we worked with realized that since their grants were moving into the area of impact investing—in the form of direct investments or loans to organizations—they needed to understand how to assess what forms of investments best suited a situation and how to evaluate impact.  The family decided that they would ask one of the members of their investment committee to attend the grants meetings regularly and set up training to assist the philanthropic staff in using these new assessment tools. 

While next generation family members’ interests maybe driving the alignment of philanthropy and investing in a family, it’s also important for those next generation family members to be prepared to navigate a host of related decisions that will arise in these areas.  As advisors, we have the opportunity to encourage a family to seek out education for next generation family members as they’re being engaged. Together, multiple generations must be prepared to make the kinds of decisions necess