2020 was a monumental year full of uncertainty and fluctuation, which left no doubt that the global business landscape, as we know it, is forever changed. Mindsets, economic, political, and social, have all shifted dramatically and it is clear that maintaining the status quo is no longer a viable option. Businesses and the people who run them had to re-evaluate their priorities and devise new strategies in almost every area. Now, a year on, the stage has been set for purpose-led investments to become the norm. Aside from the COVID-19 global pandemic, there were civil rights protests breaking out across the US, and an Arctic Circle oil spill that led Europe and Russia to declare a state of emergency. There is no denying things have changed.
For family offices, focusing on purpose-led investments is more relevant than it’s ever been. In the current tough economic times, investments that require follow-on funding rounds need investors who are well-aligned to these investments. Aligning investments to values affords investors a longer-term view, making them a better longer-term fit, qualities that are often sorely lacking in the investment landscape.
To keep up, we all have to separate the long-term signal from the short-term noise — to prepare not just for where the world is today, but where it’s going. So how can we effectively strategize for the long-term? And, just as importantly, how can we gain our stakeholders’ support? Here are three key actions for business leaders to consider.
The problem with investment myopia
The culture of quarterly earnings within the investment community is king. Institutional investors account for a large portion of the total market investment dollars, which adds liquidity on a large scale. However, it can also add volatility to individual stocks. The demand on hedge managers for positive results each quarter leads to high churn and burn. Individual investors can’t necessarily control this – but it has knock-on effects for their portfolio nonetheless.
“This is a market failure which tends to result in long-duration projects suffering disproportionately including infrastructure and high-tech investments, which often felt to yield the highest long-term returns and hence offer the biggest bang to future growth.” – Andrew Haldane, Chief Economist at the Bank of England
According to the European Parliament, there is a chronic gap in long-term investments in Europe. Since 2009 infrastructure investments in EU countries have been decreasing significantly, resulting in a substantial gap in R&D spending. On the other hand, China has been rapidly catching up and closing the gap between itself and the EU on this front. Maintaining the status quo of myopic investment is likely to exacerbate these realities. This brings to mind the old Chuck Prince maxim – ‘as long as the music is playing, you’ve got to get up and dance’.
Hedging bets against this market volatility, however, can reap real benefits. By not overreacting to short-term price swings, long-term investing can reduce their exposure to the short-term incentive structure within institutional investments. A certain level of nerve control is needed to avoid panic during downturns and over-investment during peaks. Sustainability projects will always take second place if asset managers continued to invest without concern for long-run cash flows. Good governance is a key factor in ensuring this is the case, as this instils a culture of clear-headed thinking within the enterprise.
There is growing support for taking this longer-term view within the investing community – in 2016, S&P Down Jones Indices launched the Long-Term Value Creation Global Index. This is based on the investor demand for benchmarks and the need to make it easier for long-term investors to find investments that share their values and time horizons. This indicates the formalisation of purpose-led investments.
The need for introspection
In 2018, the CEO of Blackrock, Larry Fink made global news in his open letter to CEOs everywhere. In it, he called for stakeholders to deliver, not only on profits but also contribute to society. He declared that the time has come for a new shareholder model.
“To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society. Companies must benefit all their stakeholders, including shareholders, employees, customers and the communities in which they operate” – Larry Fink, CEO of Blackrock
Fink’s highly-anticipated annual open letters and call to arms for corporates and investors alike demonstrate a fundamental change in business. Towards purpose, good governance and social equity, this shift has also become evident in the family office space. With the realisation that every family office is unique, has come the necessity to understand the family’s motives, operational contexts and investment objectives.
Purpose-led investment has become about far more than merely avoiding investing in stocks of companies engaged in morally questionable activities at the cost of profits. Many sustainable and impact investment opportunities have emerged in recent years, enabling investors to earn well by doing good.
Still, when considering various investment options, success comes from examining why investment is being made. Why invest in a particular way or with a specific focus? Why choose one deal over another?
The answers to these types of questions stem from the family’s values and higher purpose, which become the driving force of all actions. When the purpose is clear, investment time frames will be easier to ascertain and distractions are minimized.
Having a well-thought-out and defined purpose statement helps provide direction for the enterprise from an operational point of view. But, it also ensures there is also a solid frame of reference when exploring investment opportunities and finding the right fit.
Family offices are uniquely suited to purpose-led investments. Based on existing identity and cultural legacy, family offices are as well-placed as any to look inwards and ask ‘who are we, and what do we stand for?’
Purpose-led investments start with a purpose statement
When crafting a purpose statement, there is more to consider than just profit – it’s important to decipher what really matters to the family. It helps outline who the family is, what they value and how they translate this into working objectives.
It will come as no surprise that including future owners of the family business in this process can be highly beneficial to both the company and the family. Doing so not only fosters interest and engagement early on but also helps to ensure a continuity of vision, values and purpose as succession takes place further down the road. Research has shown that millennials hold corporate sustainability (something seen in the emergence of regenerative business) in high regard, making this the perfect gateway to include them in family office matters.
Once these purpose and values are clearly defined, the family can expand these into investment considerations. These can be used to determine their goals, where they want to focus their capital and the type of approach to investments they wish to take. Do this by asking questions such as: ‘is there a specific environmental or social issue close to the family’s heart?”. Or, “is there an opportunity to leverage their expertise and experience to add value beyond capital, if desired?” These answers can guide decisions about what to invest in; make it easier to identify sustainable or impact investments that align with these values, as well as understand what is being measured and reported on.
Evaluating the cost of focusing on what matters
Previously, investing responsibly might have meant sacrificing profits or taking on additional risk. This is no longer the case. Now, responsible investing might mean sacrificing short-term gains for longer-term, value and positive impact. This has the potential to cause a degree of conflict initially, specifically when traditional investment evaluations have been based solely on cash flow and the performance of price and portfolio is judged on a quarterly or annual basis.
Moving into purpose-led investments requires a shift in mindset. Both, in operational processes, when it comes to conducting investment evaluations, as well as how performance is calculated. In cases where certain non-financial factors matter more to certain family members, then it’s important to highlight these factors as part of the family office’s regular reporting.
When investment decisions are aligned to the family’s purpose and are selected based on their values and the objectives that stem from these – while still yielding returns – a committed, long-term vision becomes the new normal.
When a family office has a clear purpose, this drives strategic, operational decisions and can also inform investment decisions. Internally, everyone understands why things are done a certain way. Whether investments are managed in-house or by external consultants, those involved can efficiently source and secure opportunities that resonate with these values and objectives. This collective understanding saves time and valuable resources and will go on to ensure the success of investments in the long term.