This is an extract from the 2021 Philanthropy And Impact Investing In The World Of Family Offices Report. Download the full report here.
IT STARTS WITH FAMILY
It all starts from family values. Impact Investing (II) allows families to invest in alignment with cross-generational values. The Next-gen is very much involved in II.
When families prepare succession plans or family constitutions, the first discussions are usually about the purpose of wealth.
What is it for? The glue of successful families is their values.
What is it we believe in and we want to promote?
From there, families define goals and achievements. It is a natural flow towards defining targeted impacts.
The D.H. Chen Foundation for example has at its core the value of compassion. The foundation therefore invests in projects that have an impact on building a more compassionate society and it has created an Institute of Impact Strategy.
THE 17 GOALS
The Sustainable Development Goals (SDGs) have been around for over five years and they permeate all aspects of II, SRI and ESG. There is a tendency to view them as 17 blocks but in fact they are a system, it is all interconnected.
Nowadays, when families in Asia define their values and the deriving goals, they naturally touch on several of the SDG’s. This was the case even before 2015 when they were announced. For example, family foundations active in the fields of youth protection and education in Hong Kong, such the Yeh Philanthropy, have been impacting Goals 4 (quality education) and 5 (gender equality) for decades.
As they say in Asia: watch, do, teach. Not the other way round.
Youth education is one of the core themes of family Philanthropy and Impact Investing in Asia but education can also bring challenges for family offices. Asian families tend to send their children overseas for further education. This leads to not only a generational gap but also, to some extent, a cultural gap within the Next-gen. Knowing how challenging wealth succession planning is, with high failure rates worldwide, one must understand that this cultural gap needs to be carefully managed.
Doing this right is a herculean task. The biggest challenges in Impact Investing, as in Philanthropy, is to define the areas the family wishes to impact and to develop a strategy to deliver on these goals. The UN-SDG’s are a toolbox, they provide structure in chaos. Although all goals are interlinked, one can focus on some and analyse results against them.
A GLIMPSE INTO ASIA
For global families, I doubt the Philanthropy and Impact Investing models can work separately. Indeed in Asia a combined approach is fast becoming the norm. Most families combine Philanthropy, Impact Investing and incubators. A European family can have a foundation in Switzerland, an impact fund in London and an incubator in Hong Kong. Very often, the Next-gen is very active in the three. Some may have a deep philanthropic call others are interested in sustainable fund management, others want to incubate impactful projects or be supported by an incubator. This combined approach will have a deep impact on SDG’s, although it may not have been structured around them. The convergence of the family’s energies comes from its values. Values are the alpha and the omega of sustainable development; the SDG’s are the framework.
FamilyOfficeHK strives to assist international families in establishing a presence in Hong Kong. European family offices and family foundations are looking at ways to improve proximity to countries where their Impact Investing and Philanthropy is deployed. We help set up full Family Offices, foundations, incubators, Next-gen start-ups and family funds. Hong Kong is a gateway to Asia for international families.
Asian families have been “returning to society” for centuries. We have in Hong Kong some of the oldest foundations in Asia. In our region, Philanthropy is part of the fabric of UHNW families.
Wealth and social disparities in Asia pose far greater challenges than in Europe because of the scale of disparities. But although the stakes are high in Asia, the ability to adapt and the willingness to change are phenomenal, giving Impact Investing a formidable opportunity to deliver results.
For example, the 132-year-old Hong Kong based Chinese sauces producer Lee Kum Kee has been undertaking a plan to keep the family business alive for another 1,000 years (the average lifespan of companies listed on the S&P 500 index is less than 20 years).
How could a company last a millennium if it does not have the trust of its employees, the love of its consumers or a habitable Earth?
ENVIRONMENT, SOCIAL BUT NOT GOVERNANCE
Asian business owners are working hard to build their governance processes. The current generational shift is massive in Asia, where founders are in their 80’s. Asian founders are typically older than European baby-boomers.
The rapid change of guard is a game-changer for many family business boards in Asia. We talked earlier of Next-gen members being sent to overseas universities, where they learn about modern governance practices, which they wish to implement when workings with family structures such as the family council, the foundation or the board of the family enterprise.
TALENT SHORTAGE
There is a very deep talent pool in Hong Kong, including for SRI but some market places in Asia have not yet had the time to build up skills in SRI / ESG / II. With pent up demand for ESG funds and new guidelines (such the HKMA Guidelines of), fund managers will be ramping up their ESG analysis and reporting skills very fast. The good thing about Asia is that people are very willing to train and retrain at all ages.
ADVICE TO FAMILY OFFICES
In the short term, resilience will be a key theme for impact investors. In the long run, all fund managers will need to take sustainability into account.
In frontier markets in Asia, resilience will quickly become the most immediate concern, the urgency.
Frontier markets already face the social challenges that we mentioned earlier and they are now affected by climate change. Therefore, prioritising adequate and timely response to emerging risks will quickly become the biggest challenge for societies, businesses and fund managers involved in those markets.
Risk analysis and management have not always been at the centre of Asian family business concerns, but they are quickly learning, adopting ISO norms and resilience plans.
Do your homework yourself. Each line of investment needs to be assessed on the 3 main axis of ESG. There will sometimes be a temptation to tick boxes with online databases but the most impact will be delivered where underlying drivers of this impact are well researched.
At this stage, the international databases of service providers in the field of ESG provide limited insight into actual enterprise-level sustainability and Impact Investing. The analyses provided by these players, especially for frontier markets, is largely desk-based and relies on top-down filtering processes.
To invest sustainably and have an impact where it matters most, one needs to rely on bottom-up asset managers with on-the-ground understanding of local issues.
Families are aware of green-washing risks but diffusing those will require a lot of tedious, detailed investigation and consolidation of facts and figures.
Some families will need to rely on hands-on managers locally, some will have enough local knowledge from their long-standing presence via their local philanthropic work. This is where the combination of Philanthropy and Impact Investing that we mentioned earlier will really make sense.
FINAL THOUGHTS
In Hong Kong, families are leading the charge on Impact Investing, they are pulling the rest of the Financial Services sector forward. I see this as an opportunity for UHNW families to contribute to the paradigm shift in investment and wealth management. Families in Hong Kong in particular, have long been trailblazers.
The key word is “conversation”. Research into family dynamics has shown that what matters most is to have constructive, structured conversations. Family charters often contain a whole section about family meetings and to facilitate conversations to create a multi-generational dialogue.
ESG and Impact are the greatest challenges for wealth and asset managers, they are centennial themes of massive consequence but at the same time they are providing families with the most formidable conversation theme.
Impact is creating the sort of interaction, debate and collaboration which keep families alive.