Family offices have a history of putting their money towards causes that they care about, usually via philanthropic activities managed through a separate arm to their for-profit investments. But as a new generation of family members takes the reins of these investing and giving activities, the boundaries between positive impact and venture capital returns are gradually merging.
ESG (environmental, social, governance), or impact, investing is a huge trend across the asset management sector, with firms competing to show how they can combine doing good with delivering outsized returns. And family offices have been following suit, with research by UBS showing that almost two thirds (62%) of families regard sustainable investing as important for their legacies and three quarters (73%) are already investing at least some assets sustainably.
But despite the positive sentiment behind impact investing, it has hit a wave of controversy in recent years and might not be the ‘silver bullet’ that it initially seems. A lack of standards and a desire by many firms to cash in mean the sector is increasingly facing charges of ‘greenwashing’ and, at its most extreme, of inadvertently funnelling funds away from initiatives that really make a difference. This is the argument made by the former sustainable investing chief at Blackrock, Tariq Fancy, who recently called ESG investing a “dangerous placebo”.
Family offices should therefore think carefully before jumping into ESG and impact head-first and consider an array of strategies for how they can do something more meaningful with their money. The rise of specialist impact funds may imply that other types of investing aren’t a force for good, but this is misleading, as there are numerous ways to bring about positive change that don’t necessarily have the ESG label. Venture capital is an important case in point, as the sector has long been making a positive impact in its own right.
Venture capital inherently makes an impact
As a venture capitalist at Concentric, I constantly get asked whether we invest in any ‘impact’ projects, and I always respond with the same answer: that venture investing is inherently impactful. Here are a number of reasons why:
- Boosting productivity: Venture capital is the business of reallocating underutilised resources – capital and talent – and deploying them more productively, developing innovative solutions to solve real problems. Startups are driven by market forces, which means they naturally serve areas of the economy where there is the greatest opportunity to effect technological change, progress, and value. The consequence is an increase in productivity, employment, returns and wealth – both for investors and the economy as a whole – as well as a boost in standards of living (more on which below).
- Better, cheaper products that improve lives: By taking a risk on the power of new technologies, VCs and startups are driving huge leaps forward in service, convenience, and cost, meeting the needs of society more effectively, and affordably. Through enabling the development of better and more cost-efficient products, VCs and startups improve lives and drive a reduction in the cost of essential services, providing a clear ‘impact’ to individuals through higher disposable income and improved quality of life. For example, the UK challenger bank, Pockit, has used technology to reduce the cost of serving the swathes of customers that are not viable to traditional banks – often referred to as the ‘unbanked’. As a result, now everyone can join the modern financial system.
- Preventing abuse of market power: Without VCs to fund innovative startups, markets become lazy and uncompetitive, due to the absence of any real alternatives. This is particularly true in industries such as financial services or utilities, with traditionally high barriers to entry, that have been monopolised by a handful of big players for years. The flurry of challenger brands now coming to the fore is testament to the important role VCs play in shaking up old, staid markets, forcing incumbents to provide better products and service to customers – and thereby driving progress in society as a whole. The utility subscription service, Home Hero, has done just that, creating a fairer, more transparent market for utility services, ensuring customer loyalty is not abused.
- Increased market resilience: Greater market diversity also reduces risk, by improving the ability of society to absorb shocks or ‘black swan’ events, such as the Covid-19 pandemic, that could bring down the entire system. A constant supply of new startups helps industries to respond and adapt to both slow and sudden changes by ensuring there is no single point of failure, while also driving the development of new solutions to protect against emerging threats. This is a major impact that the VC industry delivers.
- Empowerment of individuals and democratisation: Startups empower individuals to harness the full extent of their talents and hard work by solving ‘problems’ and thereby creating value. This is very much the case today; there has never been a better, more opportune time to start a company. The empowerment of individuals is not a minor point; it is absolutely fundamental to the success of modern economic systems and democratic societies. History has taught us that treating people as a collective often ends in disaster, and the most effective route to innovation is through decentralising power structures and idea generation – an idea that is integral to the VC model.
It doesn’t have to be ‘ESG’ to make an impact
To give a few examples of areas where VC has made an impact:
Electric scooters have faced their fair share of controversy, but these kinds of micro-mobility inventions are transforming how people get around – and the environmental impact they have in the process. Polluted cities such as London are desperate to reduce the amount of traffic on the roads and VCs have spotted the opportunity, pouring billions into developing sustainable micro-mobility solutions, such as e-scooters and electric bikes, via companies such as Lime and Bird. The result is fewer cars on the road, less pollution, increased convenience, and lower costs for consumers.
The pharmaceutical industry has been broken for a long time, dominated by a few big players, who are the only ones with the resources to plough into the research and development required. VCs are investing in technologies that could speed up the pharmaceutical R&D process and increase the rate of drug discovery and allow companies with fewer resources to participate in the market. An example would be the use of machine learning for ‘precision medicine’, which uses self-improving algorithms to better understand previously impossibly complex biochemical pathways and disease processes, to understand which drugs may best treat a particular condition. This kind of technology will be a game-changer, reducing the cost of drugs for treatable ailments, while speeding up the discovery of ways to fight some of the world’s biggest killers.
Democratising financial services
Billions of people still live outside of the financial system, even in developed countries. VC investment in fintech has changed all that by democratizing financial services and making it easy for everybody to manage and make the most of their money. Anybody can now get a bank account via challenger banks that don’t require the pile of documents required by traditional banks. Investing has also been transformed, thanks to investment apps that mean anybody can start making the most of their cash, with as little or as much as they like, while avoiding exorbitant fees.
Integrating VC into ESG
VCs can’t, of course, take all the credit for these innovations, which are the work of hugely talented and hard-working entrepreneurs. However, without VCs taking the risks and channelling underutilized funds into these individuals and their ideas, many of these businesses and new sectors wouldn’t get off the ground – or nowhere near as quickly.
As many ‘ethical’ funds have discovered, impact is a tricky thing to measure. But as VCs know, impact comes in many more forms, and from many more sources, than we might originally realize. Family offices should therefore look beyond the rapidly multiplying ESG or impact labelled funds and ensure that venture is an integral part of their impact strategy.