Impact investing a potential trap for the unwary

The World Economic Forum has a message for wealthy families thinking about impact investing: don’t buy on the buzz.
Seeking investments with the dual purpose of making a profit and improving society has become trendy among wealthy people and money managers, who rarely have the expertise or tools to put it into practice, according to a report released Wednesday by the forum as it gathers heirs to some of the world’s fortunes for a discussion on the sidelines of Art Basel in Miami.
“We’re making sure that there’s a little bit of a moderating voice, hopefully getting ahead of the potential hype or bubble,” said Abigail Noble, head of impact investing initiatives at the WEF, the international organization that holds an annual meeting in Davos, Switzerland. “I am very passionate about impact investing, but I recognize it might not be for everybody. We want to make sure that decision makers within family offices begin by asking the right questions of the sector and of themselves.”
Impact investments, a phrase popularized in 2007, have attracted an estimated $50 billion. That’s a fraction of the $62.3 trillion in global assets under management, according to figures cited in the report. It also represents a small portion of the estimated $4 trillion held globally by family offices, which manage money for the world’s richest people.
Billionaires such as Jean and Steve Case, who co-founded AOL Inc.; EBay Inc. founder Pierre Omidyar; and Shari Arison, owner of Arison Investments, have put their money behind impact investments. Many family offices are exploring whether the strategy can unite relatives around social values and help engage younger generations in managing their wealth, the report said.
Family offices entering impact investing should use a multistep process, the authors said. They define their goals, evaluate how the investments fit among their existing assets, develop guidelines, perform due diligence and monitor the financial and social results. Starting with less-risky asset classes, such as bonds, or through direct investments in industries where the family has an expertise is advisable, Ms. Noble said.
(See The Case Foundation’s Guide to Impact Investing.)
Many advisers lack experience in how to evaluate impact strategies, according to the report. Other challenges can include higher costs, if families dedicate a small portion of their assets to start. Funding new companies that aim to do good involves a liquidity risk, as with many startups.
Expanding Opportunities
Opportunities for impact investments are expanding across asset classes including stocks and private equity as businesses absorb climate-change costs, consumers seek products aligned with their values and governments strike public-private partnerships to address social programs from prisons to wetlands, the report said.
In August, the economic forum held a round table in Brazil for ultrahigh-net-worth families on impact investing that attracted more people than there were seats, Ms. Noble said.
“All around the world, the next generation and women wealth holders are thinking more about social impact,” she said. “It’s got a lot of potential but that doesn’t mean that it’s without flaws.”