The Impact of Social Investing On the Next Generation
A young person from a wealthy family has an incredible array of choices as he or she enters adulthood and considers the age-old question—what will I do with my life? How do I make a difference? For the heir of a wealthy family, the many opportunities that lie ahead may include an undertone of anxiety as he or she tries to reconcile an internal conflict about the best path forward.
First, there is the challenge of personal identity. His or her life has been made special by the achievements of prior generations—some of whom have outsize achievements and personalities to match. How can he or she do anything to justify their inheritance and make a mark in life? Adding to the family fortune alone may not count for much, but just living off the family fortune is not much of a life.
Second, as the family is well known in the community, he or she wants to do something that adds luster and respect to the family name. How will they serve the community, and earn respect for what they do with their significant wealth. This brings up the question of values, of what form the family’s contribution will take. Even if he or she acts as an individual, their actions will also reflect on the family as a whole.
The aware young person beginning his or her life journey, wants to build a personal identity, that either adds to the family fortune, or to its place in the community. Is this really an either/or sort of choice, or can these competing currents be reconciled?
Working in our different spaces—as a family governance consultant and as a venture capitalist—with such inheritors, we have met young people who discover an incredibly creative, satisfying, self-building, and socially useful path of the social entrepreneur, or impact investor, to reconcile these oppositions. Taking this focus for life and work, the young person finds that the family wealth can add to the capacity of the world to sustain its future, in a way that is not simply charitable, but also offers a return on the investment. As the world moves to confront the issues of energy responsibility, education reform, and to provide a livable life for billions of people who live in poverty, good ideas are emerging that—with financial support—can make a difference that continues to grow after the initial seeding.
Impact investing takes many forms with varying degrees of targeted financial returns, ranging from nonprofit entities to those that seek market rate returns. While some of these efforts may not lead to a product or service that can bring a return on invested capital, they share the quality of directing—not ameliorating—current pains in a strategy that leads to capability development that helps deal with the situation in the future. These ventures are entrepreneurial in that they gather the dedicated energy of a network of people to make a difference and, if not self-sustaining, they at least have an impact far in excess of the capital they use. They include business ventures that create products that are useful to meeting social needs, that can be developed as profit-making ventures that have the potential to generate market rate returns.
While this style of investing can help define a family member while honoring the legacy of the family wealth creator, it is not the same-old socially responsible investing (or SRI). While SRI is typically referring to reverse screens for publicly traded equities—no alcohol, tobacco, firearms or casinos, for example—impact investing can go several steps further to focus on proactive solutions. By focusing on certain industries and opportunities where technologies are being used to not only solve problems, but make money, families can no complement their charitable giving with their investment thesis to have a more complete approach to problem solving.
If this young person was interested in education reform and supporting teachers, their options to effect change are higher now than they have ever been. They can, for example, donate to a nonprofit organization or even individual classrooms and teachers through Donors Choose; invest in a for-profit company designed to mass produce high-quality teachers, like 2tor; or become an entrepreneur and create their own solution. The next generation can help their family innovate by combining return on family capital with social responsibility.
Not only is the line between for profit and nonprofit graying, but the opportunities to achieve both impact and returns simultaneously are expanding by the day. For the first time, families that are willing to consider their social mission while executing against their investment thesis, have options in most asset classes and geographies. These families can now not only work to protect and increase their asset base, but in doing so they honor the legacy of the original wealth creating entrepreneur.
This route is a way for multiple generations to work together in a way that respects each of their value sets and perspectives. In one company we know, the patriarch set up a charitable lead trust that could invest in socially responsible ventures. He felt that this was a way to involve and engage his son and daughter who were passionately interested in sustainability. The governance of the trust had the voting power over investments in the hands of the recipients, creating a special partnership and unifying opportunity between the two generations. The younger generation became very involved not just in giving to them, but in working with these ventures to insure their success. Their hard work deeply impressed the older generation, demonstrating both their commitment and their emerging capability.
Placing oneself and one’s family in this realm, offers a special path to doing important work and becoming a worthy heir with a sense of self-worth. This is a path that was not really open to prior generations and allows the new generation to make a distinctive contribution to themselves, to their family, and to the community—a distinctive contribution that can enhance both the sustainability of the family assets and the sustainability of the world.
NOTE: This article was co-written with Josh Cohen of City Light Capital and was originally published in the October issue of Private Wealth.