This type of investing can bring families together around shared values while offering the potential for financial returns.
It’s common for high-net-worth individuals and families to give back to society through philanthropic and charitable ventures, providing financial support to causes and projects that align with their values, even when they typically don’t yield financial returns.
Recently, the evolution of responsible and sustainable investing has given individuals the opportunity to support pressing issues – such as combatting the effects of the climate crisis – through collective investment funds and other financial vehicles that not only help deliver change but also have the potential for returns.
Yet our world faces many challenges, from countries devastated by natural disasters and human-led conflict to the need for equitable access to education, healthcare and clean water. Many of these issues resonate with people who want to make a difference both globally and in their own communities. Impact investing is helping make it possible for them to effect change.
While there is often an overlap between various other responsible and sustainable investing approaches and impact investing, the latter is marked by an intentional desire to generate positive, measurable social or environmental impact alongside a financial return.
“There’s also the element of ‘additionality,’” says Stephen Metcalf, head of Sustainable Investing at RBC Wealth Management in the British Isles. “This refers to a positive impact or outcome that wouldn’t have happened otherwise. For example, a reforestation project that wouldn’t have taken place without investment.”
Impact investing is an area that is generating considerable interest among investors. Indeed, the Global Impact Investing Network (GIIN) estimates the size of the worldwide market at US$1.571 trillion , the first time that the figure has topped the US$1.5 trillion mark.
“Among the trust clients I work with, there is definitely more interest,” says Julie Kleis, director, Fiduciary Specialist Team at RBC Wealth Management in the British Isles. “They recognise they have the power to make a real difference in areas that matter to them, but they also see impact investing as a way to engage the next generation in meaningful projects.”
According to the GIIN, the impact investment market provides capital to address the world’s most pressing challenges in sectors including energy, microfinance, healthcare, sustainable agriculture, infrastructure and housing.
Those who want to invest in an impactful way typically choose issues or sectors that are close to their hearts, explains Metcalf. “There’s definitely an emphasis on environmental concerns, partly because that’s so ubiquitous. But some clients have specific things they want to target,” he says. “Some are very focused on women’s issues, for instance, whether that’s women’s health, rights or education, while other clients are focused on particular parts of the world.”
Other common areas, particularly in the UK, include the environment and issues around water and pollution, alongside reforesting, rewilding and biodiversity credits.
“The key thing about impact investing is to seek investments that directly correlate to your cause so you know where your money is going and what the potential returns may be,” says Metcalf.
Impact investing provides a real opportunity to engage younger generations.
“Charitable work, philanthropy and impact investment are all ways of having conversations around family values and bringing the younger generations to the table,” says Kleis. “Are there cross-generation projects that everyone can work on, or do the generations have very different interests and values?
“It’s not unheard of for the children and grandchildren to be on a completely different page to the older generations, so one approach might be to give them the opportunity to invest in their own impact projects.”
Critically, getting the younger generations involved in projects they are passionate about, whether through impact investing or charitable efforts, can create a legacy that everyone can be proud of.
It can also help create a springboard for broader conversations about finances and a starting point for assuming more responsibility around family wealth.
Invite the younger generations to research the issues they care about, or to find new potential areas of interest they may want to invest in. The more connected they are to an issue, the more likely they will want to become involved in giving back over the long term.
There are many ways to get involved in impact investing. Private market funds that invest with an impact objective are available across all asset classes, including venture capital and infrastructure.
There are also fixed-income impact funds that invest in specific projects, as well as outcome-based or “pay-by-results” investments. Returns can vary significantly, particularly as the latter depends on a positive outcome.
Impact investing, combined with a charitable vehicle like a trust, donor-advised fund or foundation, offers an opportunity to engage the next generation in discussions about where the investments are deployed and how they will be used without gifting direct access to large sums of money. There can also be tax benefits through structures like Enterprise Investment Schemes. These estate-planning tools can provide controlled, tax-efficient ways to make charitable donations and establish a legacy of giving within your family.
If you are interested in impact investing, there are several factors to consider, including:
Impact investing can deliver significant benefits – both financially and for society. The personal satisfaction of aligning your investments with your values can be immense, creating a legacy that resonates across generations.
Contact our wealth planning team to put your wealth plans on a path for success.
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