Historically, entrepreneurial families have always had in their values, the desire and passion to have an impact around them. Be it in their community, in their home country, in the field of sports, education, environmental protection or humanitarian aid as well many other causes that are dear to them. For some, this takes the form of impact investing or philanthropy, but by approaching these holistically, family businesses have the means to change the world.
Impact investing, philanthropy and families: Why only some family businesses, more so than others?
Despite their wealth, they don’t only cultivate financial capital. They also develop and successfully leverage:
- Their family’s human capital: to align its members to prepare the next generations to undertake and invest together, develop their entrepreneurial orientation, take over the operations of the family business and become a director.
- Their societal capital: their commitment beyond their company to contribute to a positive social and environmental impact in their community, within their territories in which they have their operations and in collaboration with the public and private ecosystem that surrounds them.
- Their reputational capital: the ability to communicate their contribution to the major challenges they face.
Family businesses – especially century-old ones that Dennis Jaffe calls ‘generative families’ – have developed, often through their family foundations, the financing of actions outside the company to use their wealth for good. Be it to help the weakest, to contribute to improving education, to finance health programs or programs to support the most deprived communities or countries around the world. These families have supported sports programs, the development of social and societal projects and have often influenced (in many cases, ahead of their time) the improvement of working conditions for their employees.
Today, this tradition of family businesses has not changed, in fact, it tends to be even more common. What is changing is the market’s appetite for the issues of our time, which sees family businesses contributing to social and environmental impact without eliminating profitability. And the new generation only wants to accelerate this phenomenon. For some, the change or pivot is already well underway, for others, it is not necessarily obvious.
There is therefore a need today to integrate the impact dimension at all levels of the family business and entrepreneurial families. Below, we unpack how to create a virtuous dynamic between the three circles and how to begin to marry impact investing with philanthropy.
What’s at stake?
Within the family business, there are three stakeholders – the company, the shareholders and the family itself. And their stakes and interest vary between them. In the company’s circle, they’re focused on looking for success in its markets. The shareholders’ circle looks to prepare its future directors but also to diversify its assets. Lastly, the family’s circle, which has been cultivating its reputation and its societal projects ‘as a family’ for several generations. The stakes are also fiscal, as the legislation precisely frames the different ways of directing one’s capital towards projects with a high impact on the planet – and these differ from one country to another.
Philanthropy and impact investing: Is it different?
Philanthropy is the act of donating financial or material goods to a non-profit organization for a cause of general interest. The goal is to have a significant impact and a measurable societal return. Those mainly involved in philanthropy are the patrons who finance the foundations distributing to associations acting on the ground, working to solve the major challenges of our time.
Impact investing is the act of investing in assets that have a positive impact on the planet. The objective is to obtain both a societal return and a measurable financial return. Impact investing is developing in all asset classes. Both within the company through innovation, but also in the circle of shareholders, through the diversification of assets – by pivoting the private equity asset class towards projects with a relevant and measurable social and/or environmental impact. This means investing in unlisted companies that have a measurable impact on the environment and/or society built within their DNA and mission.
Philanthropy and impact investing are complementary, both having the common objective of having a positive and measurable impact.
How can the complementary relationship between impact investing and philanthropy be reinforced?
Based on the above definitions, one might wonder what the point of philanthropy is since in the end it only provides a societal return. Whereas impact investing provides both a societal and a financial return.
Philanthropy has the capacity to contribute to solving major environmental and social problems that cannot be monetised. It has a major role to play. In terms of responsible consumption, for example, much of the change has to come from consumers themselves and to do this there is a need to raise awareness that only land associations can do. Philanthropy, therefore, intervenes where impact investing reaches its limits in terms of impact.
On the other hand, impact investing is a powerful tool to mobilise philanthropic funds. Returns on investment can be reused over and over again to increase impact. This attracts more investors because it gives them greater freedom and flexibility to test innovative ways to achieve financial returns in their search for impact. It also, and possibly most importantly, breathes new life into or complements their philanthropic strategy.
In light of this information, in the impact investment strategy of an entrepreneurial family, it’s important to define the place of both philanthropy and impact investment.
Here are the questions to ask when aligning philanthropy and impact investing:
- Do philanthropy and impact investing have separate fates or can they complement each other? Can they fulfil a common vision?
- Since impact investing has the advantage of long-term profitability, how can we ensure sufficient support for philanthropy in the long term?
- How can we find a virtuous model that would combine both approaches while preserving family harmony, developing its entrepreneurial orientation, supporting innovation and business development that still has a measurable societal impact?
How to marry philanthropy with impact investing?
The American model
In the United States, many foundations institutionally manage their assets, and this management forms an integral part of financing philanthropic actions. On the other hand, more and more foundations want to align their assets with the mission they serve and there is a shift from larger endowments to impact assets. Here are a few examples.
- Ford announced in 2017 that it wanted to spend $1 billion of its $12 billion endowments on mission-related investments. The foundation initially looked at private equity funds and also included investments in the capital markets.
- The Kellogg’s Foundation announced in 2007 that it would spend $100 million on mission-related investments and $50 million on program-related investments.
- The Heron Foundation‘s entire endowment is invested in mission-related assets. Typically, foundations separate their investment staff from their grantmaking staff. In an unusual move, Heron has merged its investment and grantmaking operations into one team as part of its transition to 100% impact investing.
The French Model
In France, the approach is slightly different. Endowments are less important, managing foundation assets tends to be more timid and does not, most of the time, fit into the budgets of philanthropic actions. Most of the assets are positioned as SRI and very secure. However, some foundations are beginning to take an interest in impact investing, some just in their asset allocation strategy, others by integrating it completely into their ecosystem and placing it at the centre of their economic model.
Indeed, several foundations are beginning to integrate impact investing into their asset allocation.
- The Carasso Foundation is a pioneer in integrating impact investing into asset management. The foundation has created an impact investment fund in collaboration with Quadia, with sustainable food as its theme.
- The Fondation de France has created the France 2i fund in collaboration with Raise and has allowed some of its sheltered foundations to invest part of their assets in this fund.
- The Caritas foundation has created an impact investment fund with its sheltered foundations.
The Alphaomega foundation on the other hand has chosen a different positioning and Elisabeth Elkrief, director of the foundation, explains it:
“The classic impact investing consists in investing in the same underlying, generating both financial performance and social impact with a small “s”, limited to areas such as gender equality, wage policy in companies, etc … But for the big “S” of societal problems such as the education of young people from modest backgrounds or extreme poverty, it is almost impossible to generate economic profitability to solve these problems. The innovative approach of impact investing that we defend consists of separating the financial and social underpinnings. On the one hand, financial assets managed by asset managers generate financial performance. On the other hand, a portion of these financial products is paid to a venture philanthropy actor. The latter acts as a crucial professional intermediary to generate societal impact. To each his own. The partnership that we concluded with Groupama Asset Management last year is an illustration of this with a sharing product that enables us to redistribute part of the financial performance to venture philanthropy and thus maximize the social impact of the associations that we support. As we have seen, some projects are difficult to finance through impact investing, so the separation of the underlying assets can offer a different solution for attracting more financiers/donors to finance philanthropic actions.”
Finally, the positioning of the Terre & Fils endowment fund is also different. Using the complementary relationship between endowment funds and investment companies, they have built a hybrid model articulating them. These two tools serve the same common good: the endowment fund is a general interest structure, whose subsidiary Terre & Fils Investissement extends the action with companies. The profits generated by the latter finance the general interest missions of the endowment fund. Here, the impact investing activity must eventually finance all of the endowment fund’s activities, such as raising awareness.
So where to start to make an impact as an entrepreneurial family?
The blending of philanthropy and impact investing has created new ways of making an impact as an entrepreneurial family. There are three circles in which to make an impact.
- The family business: The business can consider redesigning its operations to integrate CSR criteria and redefine its mission and impact. The business can also undertake external growth operations by looking for targets that would allow it to respond to its mission and amplify its impact.
- The shareholder: The company’s shareholders can create an impact investment fund to diversify their assets and amplify their impact. It may also be an opportunity to diversify the business and give opportunities to the next generation to come on board differently.
- The family: The family can unite around a common cause on which it wishes to act through a foundation, financed either by the company or the investment fund or the family members themselves or by public generosity.
What changes the game, however, is the ability of entrepreneurial families to link these 3 circles so that they work together. To do this, family members and family business leaders should be able to answer the following questions.
- How can a sustainable family vision influence the mission and vision of the business(es)?
- What sustainability goals does this family vision propose to address? In cascade, what sustainable and impact investment strategy have we settled for the next 10 years?
- How will the shareholders’ circle prepare the next generation to meet these challenges and win new markets tomorrow?
- How can the family impact fund serve as an incubator for future innovations or diversification of the family business?
- How can the business and the family impact fund feed philanthropic actions that also contribute in a virtuous way to the same family vision?
The next level
Let’s imagine that the family decides to create a family impact investing fund based on the family vision and values with clear and measurable KPI based on the 17 Sustainable Development Goals (SDG). Let’s also imagine, depending on the country’s fiscal and legal conditions, that the shares of this fund would be split into the family business, the historic shareholder (often, the holding) and the foundation. As the impact fund creates value over the next 8-10 years, some of that value will be directed to the foundation as a shareholder, creating a sustainable funding loop for the philanthropic sphere.