Traditionally, in the world of finance, two key dimensions have been used to evaluate asset performance: risk and return. However, at the beginning of this century, significant changes in this perspective began to emerge. More sophisticated investors, such as pension funds, endowments, insurance companies, family offices and multi-family offices, became aware that the world is undergoing a number of transformations. the world is undergoing a number of transformations and that our investment decisions can have an impact on the future..

One of the first to talk about this was the Rockefeller Foundation, which laid out a theoretical framework for understanding where we are on the investment spectrum and when it stops being investment and becomes philanthropy.

1. Traditional InvestmentsAt this end of the spectrum, there are no significant filters, and the main objective is to obtain the best possible risk-adjusted return. Other factors such as corporate governance, social and environmental (ESG) criteria are not taken into account.
2. Responsible and Sustainable InvestingAs we move towards this spectrum, we find investors applying ESG criteria to select companies in their portfolios. Responsible and sustainable investments differ in the intensity of their focus on these filters. Sustainable investments tend to be more active, using, for example, voting at shareholder meetings to push for a certain policy or business change to fit one of the above criteria.
3. Impact InvestingIn the middle ground between investments and philanthropy, impact investments seek both financial return and measurable social or environmental impact. They can vary in their approach, with some seeking financial return first and then impact, while others prioritize impact and then financial return.

In moving towards more responsible and sustainable approaches, investors often face biases and challenges:

• By including more ESG restrictions or criteria, am I leaving money on the table? Do my ESG or Impact investments yield less than traditional investments?
• Can I build diversified portfolios or will I only be investing in different niches such as renewable energies? Are they riskier than traditional investments?
• Am I really investing with the intention of bringing about change or was I a victim of greenwashing? greenwashingHow can I avoid it?
• Do I have access to the best managers related to ESG investments or with a focus on Impact Investing? What should I expect from these managers?
• What variables are key when analyzing these investment products: return track record, risk, costs, manager history, consistency, etc.?
• What is the most efficient way to generate impact: liquid or alternative products?

And the last question, and perhaps the most important: How do we measure the impact generated?

In order to focus on the solution to different problems, the UN launched the Sustainable Development Goals (SDGs) in 2015.In 2015, the UN launched the Sustainable Development Goals (SDGs), which address the most pressing problems and how investors could help solve or mitigate these issues.which address the most pressing problems and how investors could help solve or mitigate these issues.

Ultimately, the decision to include these types of investments in a portfolio will depend on each family. However, it is important to have solid and substantiated arguments when discussing this topic, especially if these changes are driven by the second or third generation, and to remember that these decisions do not amount to philanthropy, but can contribute to both financial objectives and a positive impact on society and the environment.

Family Office Team