Thu, Nov 30, 2023

Business, Banking & Finance
Wealth's triple helix: Balancing sustainability, impact and philanthropy

By Christopher Greenwald, Head of Sustainable Investing, LGT Private Banking

Making money and donating money were once considered unrelated, discrete activities. But the past decade has ushered in a rethink. Many individuals and families are taking a more holistic view of their wealth, by considering how their investment and business activities impact people and planet.

The realisation has dawned that while philanthropy is a noble activity, it can act only as a buffer – a corrective mechanism to an economic system. It cannot, alone, solve systemic problems. While the majority of wealth stays tied up in investments that can have a negative impact, philanthropy will yield limited results. It is imperative that more resources are mobilised, to avoid a situation where investors are working against themselves: creating problems on the one hand and donating on the other to treat these problems.

It is important to note the distinction between sustainable investing, impact investing, and philanthropy, given that definitions have historically differed.

Sustainable investments are those which integrate environmental, social, and governance (ESG) criteria into investment decisions, aiming for financial returns while considering the social and environmental impact. Impact Investing pursues financial returns while having a more pronounced focus on social or environmental outcomes, aiming to generate substantial and measurable positive impact alongside financial gains. Philanthropy, meanwhile, involves donations for social impact with no expectation of financial return.

At LGT, we make a distinction between strategic forms of philanthropy, that aim to maximise societal impact (and in some cases support systemic transformations), and charity, which focuses on the act of giving itself. Understanding this spectrum is vital as it offers a set of tools to address various societal and environmental challenges. Each approach complements the others, filling gaps and enabling a more holistic way of making positive change.

Complement not competition

Imagine a family whose wealth is predominantly derived from their partial ownership of a large mining company. This investment yields substantial financial returns, but it also poses challenges due to the sector’s history of environmental damage, corruption, and human right abuses. Recognising the necessity of the mining industry for the energy transition, given increasing reliance on key commodities like copper, nickel and lithium, the family faces a dilemma as they navigate the tension between financial gains and the industry's drawbacks.

In an effort to address the negative consequences, the family engages in philanthropy, donating a significant portion of their wealth to environmental and community initiatives. However, the underlying issue persists, as the majority of their wealth remains tied to the mining sector, contributing to environmental and social challenges. The family finds themselves in a paradoxical situation, simultaneously profiting from mining investments and striving to mitigate the harm caused by the industry through charitable contributions.

A more sustainable approach could include advocating for changes in the mining company’s business practices or even divesting away from it. The point being that to achieve a more sustainable and effective strategy overall, the family and their advisers need to ensure that the wealth is mobilised in a way that aligns with their overall values and ambition to create a positive contribution.

Sustainable investing, impact investing, and philanthropy share a common goal of achieving more positive outcomes for society and the environment. Nonetheless, they each have their own strengths and can be employed effectively in different situations. It is important to note that the choice between sustainable investing, impact investing, and philanthropy is not an either-or proposition – they can and should work hand in hand. Just like a portfolio of financial investments benefits from diversification, so too does taking a diversified approach towards positive impact.

The rise of engagement

A well-constructed sustainable investment strategy will consider environmental and social issues by, for example, only screening in businesses that promote fair labour practices, or those that produce their products or services in a way that does not cause undue harm to the environment. But one of the most rewarding and interesting areas of sustainable investing comes via shareholder engagement, which involves asset owners and asset managers lobbying companies to make improvements to their sustainability efforts. This allows investors to keep their portfolio diversified and include more ‘challenging’ sectors like oil and gas, whilst still driving positive change.

As the interest in investor engagement continues to rise, sustainability research providers and large asset management firms have incorporated engagement services into their repertoire. These services aggregate investors' assets and advocate on their behalf, affording smaller investors like family offices and private banks the opportunity to leverage the substantial size and influence needed to instigate change within the world's largest corporations.

When only philanthropy will do

Despite all the good that can come from techniques like divestment, screening, and shareholder advocacy, there are still global problems that are best suited to be addressed through philanthropic giving – free of the profit motive that accompanies sustainable and impact investments.

An example is delivering last-mile healthcare in remote areas, which may not have the population density or income to support profitable medical services. Scientific research is another area: funding fundamental research with a higher risk of failure, no clear commercial application, or profit potential often relies on philanthropic contributions. Donors also play a significant role in supporting the arts, cultural institutions, and creative endeavours that may not be financially self-sustaining or driven by traditional market forces.

Bringing in the next generation

As we have seen, failure to view family wealth as a holistic whole can lead to situations where investment capital and philanthropic capital cancel out each other's aims. This means it is crucial that families and their advisers carefully consider their objectives, integrate their strategies, and align their financial and impact goals. This conversation can be an invaluable tool for engaging the next generation. Many younger family members are increasingly interested in sustainable and impact investing, and positioning money as having purpose can help attract and retain their interest in, and support for, the family's wealth management strategy.

Investing and philanthropy are not adversaries; they can be partners in advancing positive societal and environmental impact. They complement each other, offering a dynamic approach to family wealth management – meaning the boundary between purpose and profit continues to fade.

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