Taking a holistic approach with your capital to make more of a difference

Wherever we look around our world, there are a multitude of social and environmental challenges demanding our attention. For many, a personal experience or connection has evoked a passion to tackle a specific cause or issue. Knowing where and how to have the greatest impact can be difficult, however.

Whether you’re controlling family wealth or a foundation, or in your role as a trustee of a charitable organisation, you may feel a greater responsibility to make the world a better place. Giving your time, effort, and money to make a change in the world can be satisfying and worthwhile, if done smartly.

But what if you could do more to make a difference with something else you already have? Many already are.

According to the latest Investing for Global Impact report, 31% of those involved with philanthropic activity are also active in sustainable and impact investing¹. And as global philanthropist, Dr Malini Saba, explains in the report: “Philanthropy and impact investing go hand in hand.”

Now in its seventh year, the report, created in partnership with Barclays Private Bank, Campden Wealth and Global Impact Solutions Today, provides unique insight into the attitudes and actions of some of the world’s wealthiest individuals, families, family offices and their foundations when it comes to generating positive impact with their capital.

Damian Payiatakis, Head of Impact Investing at Barclays Private Bank, says: “Sustainable investing responds to the desire to invest purposefully. While an increasing number of our clients are choosing to invest their core portfolios this way, the option to invest to catalyse solutions to the world’s problems has a particular attraction for families, foundations and charities with ambitious societal missions.”

Here we discuss why and how these leading investors are using their portfolios alongside their philanthropic and mission-led activities.

Clarifying the different approaches

While philanthropy, has existed for millennia, the sustainable investing field is far more recent. Consequently, terminology is frequently neither clear nor universally used. Rather than attempt to solve this issue here, we set out three investment approaches we generally see being used, clarifying why investors might want to use them and the effects each has on the investment process.

The first, ethical investing, is probably the most familiar and frequently used. Ethical investing uses a set of values or beliefs to determine what is acceptable for your investment portfolio. These may come from religious, moral, or normative beliefs, but are distinct to each individual or organisation. Simply put, what’s ethically acceptable for one investor may not be for another – for example, abortion or defence. The action of excluding sectors or companies involved in these activities is a direct way to express strongly held views.

A second approach

A second approach is responsible investing, in which investors use additional non-financial data to inform their investment decision-making and more actively steward the assets they hold. Non-financial data is structured around environmental, social and governance (ESG) topics and can be incorporated through various methods – ranging from screening companies based on ESG ratings to the integration of ESG insight into fundamental company analysis.

Investors also often act as more active owners by voting shares (if held) and/or engaging with companies to seek to influence their behaviour. With this approach, an investor’s main focus is on the internal operating practices of a company and their interest in this is primarily financial; to mitigate financial risks and protect or enhance the value of the investment.

The final, and most recent, approach is impact investing, where consideration of impact is integrated throughout the investment process with an intentional focus on both financial and societal outcomes. Generally this means selecting high-quality companies benefiting stakeholders in how they operate, or identifying high-growth sectors that are addressing urgent social and environmental challenges. Investor motivations are multiple and blended, where the investor intention can be driven from financial interests, personal ones, or both. In some cases, investors may also decide to prioritise outcomes over gains.

Notably, these approaches are not mutually exclusive, so an investor can use one, several, or all in relation to their portfolio. Therefore, investors have to decide which approach(es) support their objectives.

The benefits of a holistic approach

Having considered these options, it’s worth thinking about how these investment approaches could be used alongside, and in support of, your philanthropic efforts.

First, you should be confident that your investment portfolio will not contribute to the issues that you are passionate about addressing.

As Payiatakis shares, “One second generation family principal in his late sixties had made tremendous effort to conserve and protect the natural environment through his philanthropy and the family’s charity. However, he realised that his family’s wealth might actually be contributing to the environmental degradation he’d spent most of his life trying to prevent. We discussed how to start shifting his family’s portfolio to divest these holdings. As well as how the family could invest into opportunities that provided solutions to the same issues he was seeking to address through his philanthropy.”

Moreover, what you’re invested into may not be only your concern. Increasingly, the public and media will hold you accountable for your investments, especially when you are public about your mission. Recent examples of charities whose investments were found to include companies that went against their espoused missions has led to significant reputational damage. In fact, 77% of the UK public said they would be unlikely to donate to a charity if its endowments or other assets were invested contrary to its mission².

Doing more with what you have

Aligning your investments with your chosen causes may also help address the challenge or issue more substantially and actively. Investment portfolios tend to be far larger than annual charitable giving or operating budgets.

As Emma Turner, Director of Philanthropy at Barclays Private Bank, points out:“Families can get a double benefit by impact investing alongside philanthropy. While donating money to a charity,  in the most effective way, they can also deploy more capital to the same cause through their investment portfolio. And the returns they get while doing some good, means they can reuse that money for further investment or giving.”

The link between philanthropy and sustainable investing bears out in the report too. The motivations underpinning both, expressed by respondents in the report, are remarkably similar. The overall top motivation (27%) for those engaged in philanthropy is ‘a sense of responsibility to make the world a better place’ – and this same sentiment is shared by private wealth holders as the primary reason they invest for impact (38%).

A perceived tension

Reading further, a small percentage (16%) of respondents were motivated to invest rather than give as they felt that: ‘Investing is a better use of funds than philanthropy to address societal problems’. In a time when resources are scarce, investment portfolios competing for funds may be an unsettling thought. However, Payiatakis disagrees. “Statistics may suggest some tension between philanthropy and impact investing. But actually, as Dr Saba points out, there really doesn’t have to be a conflict. Reading into the numbers, misses an opportunity of how the two can work together to create better outcomes.”

Or, as one CFO of an American foundation noted in the report: “I don’t see impact investing taking over philanthropy. Hopefully we get to a place where they’re symbiotic. A truly progressive foundation would have an integrated strategy of giving and investing. There will always be specific challenges that will require support more akin to a grant/donation. And, there will be opportunities that are better supported through an investment.”

Moving from interest to action

Interest in this more holistic approach is growing, says Ian Chesham, Director of Charities and Not-for-Profits at Barclays Private Bank. “From both a governance perspective as well as a desire to achieve your objectives, aligning investments with your overall values makes sense,” he says.

The report highlights this growing interest, showing that wealth holders plan to increase their allocation to sustainable investing from 20 per cent in 2019 to 35 per cent by 2025. Furthermore, a quarter (27 per cent) of all investors expect to move to more than 50 per cent of their portfolio within five years.

Turning that interest into action can be a stumbling block, however. “From my own experience,” Chesham continues, “there’s a feeling from charities of all sizes that this is something they should be engaging in – but there’s a lack of deep understanding and a genuine fear of making a mistake that’s holding them back.”

Understanding the investment terrain

The field is rapidly evolving and many individuals can have preconceived, legacy notions about investing only being about returns. That can make it hard to explain and discuss sustainable investing with your family, charity’s trustees, or an investment committee. “Even before getting to investments, we spend considerable time helping clients get comfortable and supporting them to understand the field,” says Chesham. “I don't think people realise what is now possible in investing.”

When first exploring the idea, one of the most common hurdles to progressing the conversation is the perception that investors will be required to forfeit investment returns if they deviate from 'traditional investing'.

Chesham explains “We sit down with clients to review their existing portfolio and the different approaches they could use. Investors are often comforted to know that sustainable investing does not necessarily mean allocating capital to an esoteric, high-risk opportunity in an illiquid or opaque structure that can be difficult to understand or explain to their stakeholders. It is important to realise that there is a spectrum of options.”

Furthermore, there is a body of academic research and market performance data that quantifies the argument against these legacy notions of underperformance, and can support investors in making informed decisions. He shares the example of how one organisation that had previously rejected the idea of incorporating impact considerations into their portfolio, reconsidered their position during the first half of 2020.

The market-turbulence caused by the COVID-19 outbreak provided a perfect case study of the role of sustainable investing; specifically incorporating ESG factors and targeting companies that are positively addressing the UN's Sustainable Development Goals.

As Chesham notes, “Our role is to take them on a journey, hold their hand along the way and let them lean on our expertise and benefit from the experience of other charities across Barclays.”

Articulating your ambition

With a better view of the landscape, considerations should turn inwards. Articulating your family’s or organisation’s values and beliefs provides the compass point for the journey ahead. It also requires a deep dive into what you want to stand for, what you want to achieve, and what you want your legacy to be. The result of this effort should be a revised investment policy that incorporates the values and objectives you’ve identified and guides shifts to the current portfolio and its direction in the future.

In one case, the Barclays Private Bank Charites team were working with a leading grant-making charity who were achieving acceptable investment returns from their portfolio, but expressed a desire to deliver more tangible social and environmental outcomes. Having spent time to educate trustees, it became clear that the challenge was to help them firstly establish the collective values that they wanted their investments to stand for. Investment Committee members, wider Trustees, and other internal stakeholders attended a workshop hosted by the team to gather a cross-section of views from the organisation.

They started by asking participants to list the values they believed should be considered when making investment decisions, particularly with respect to ethical restrictions that they believed to be most important to their charity. It became clear that they would not be able to move forward without first reaching a consensus on the areas of the market to avoid, before selecting those to support.

Values

Indeed, translating one’s personal beliefs into a collective set of values can be challenging, but on this occasion it was the key stumbling block that was preventing the charity from pursuing an holistic investment strategy that aligned with their grant-making.

Following some challenging and, at times, tense conversations amongst participants of the workshop, the charity agreed in principle to the causes that mattered most, and which industries should no longer be included in their portfolio.

As a result, the charity has ratified a new investment policy that places their purpose and values at the centre of their investments. They are transitioning their existing portfolio to one that they are confident can still deliver returns while supporting the outcomes of their mission. Moreover, by articulating clear investment values, the charity has been able to foster greater engagement with trustees, donors and other stakeholders.

Navigating your course

With a deeper understanding of options and how they align with your objectives, you are better prepared to navigate the opportunities available. The challenge is to identify potential investments that fit your investment policy and that can help you achieve your aims, avoiding those that simply greenwash their activity to make the most of the growing interest in this area.

“You should always look at potential investments – whether traditional or sustainable – in a systemic, even slightly cynical, way,” advises Chesham. “We’ve always undertaken thorough operational and investment due diligence, and now ESG and impact due diligence across the relevant investment offerings. You shouldn’t be blinded by marketing that fits the emotional pull of your cause and values.”

That’s where the similarities between effective philanthropy and sustainable investing converge again. “It’s all about making clear and rational decisions without allowing emotions to override sense,” says Turner. “In giving, that means rigorously reviewing a charity’s governance, financials and its track record as part of identifying it’s a cause you want to support and that will help you make a difference.”

For respondents of the report, the most significant barriers to starting or increasing sustainable investing is perceived to be a lack of high-quality investment opportunities with proven track records, as noted by 20% of respondents. Positively, there are a growing range of opportunities with Morningstar now tracking about 3,300 global sustainable funds, and noting 230 new launches during the first half of 2020³. Though this also means investors now need more capability to undertake thorough due diligence in order to find the truly ‘high-quality’ ones.

Taking the first steps

As a family member or trustee who has committed to creating positive change with their capital, combining both philanthropy with impact investing can actually strengthen your whole approach, as Payiatakis explains: “We need to see philanthropy and sustainable investing as complementary rather than competitive. Alone neither philanthropy, nor investing, nor government can solve our urgent social and environmental problems. Families and charities should be using all their resources to address the issues they are passionate about.”

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