Wealthy families embrace systemic rethink to impact investing

Pioneering wealth managers, family offices and educational institutions are re-evaluating the purpose of investments and measurement of their impact

With traditional environmental, social and governance (ESG) and impact investing frameworks increasingly called into question, many families and practitioners are looking for a more structured approach, applying systems thinking to develop a strategic, long-term blueprint.

One of the pioneers of this ambitious perspective, blending sustainable finance with systemic investing, is Dr Falko Paetzold, managing director at the Centre for Sustainable Finance and Private Wealth (CSP) at the University of Zurich.

“What we have seen is a bunch of things wealth holders really struggle with in order to have more impact with their money,” explains Mr Paetzold, whose unit has been developing investor education tools in collaboration with other institutions, including US giants MIT and Stanford.

The overarching question is whether or not the investments of wealthy families actually make any major impact on society. “We’ve got very nice portfolios of impact investments,” reflects Mr Patzold. “But what’s really changing?”

The answer, he believes, can be found from understanding and engaging with systems, rather than assembling portfolios of disconnected “point solutions”.

“You’re literally not seeing the forest for the trees,” he says. “It’s silly from an impact perspective — and from a financial risk-return perspective — not to first think about how the system operates, and how the system will change.”

Coherent strategies

The approach championed by Mr Paetzold aims to map out the systems families wish to influence, identify leverage points, and align diverse forms of capital — from venture capital and private equity to philanthropy — around a coherent strategy. This is already gaining traction among leading family offices and foundations, he says.

“We often point to portfolios like Lucas Walton’s Oceans initiative,” he says, referring to the Walmart heir’s multi-capital strategy for marine conservation. “He mapped out what needs to work for healthy oceans and then built investment deals, insurance products and philanthropic initiatives around that.”

The goal is to shift from isolated action to co-ordinated influence: what Mr Paetzold calls “a portfolio that is more than the sum of the parts”.

A hallmark of systemic investing is the identification of “trim tabs”: small interventions that can catalyse outsized change. “That’s the type of intervention you want to identify,” he says. “At the same time, you want to avoid deploying capital into something that’s running contrary to regulation, or that simply isn’t going to survive.”

Importantly, systemic investing requires not only a more strategic lens but also a more patient and sophisticated view of impact. “It’s very easy to measure the impact of planting a tree,” says Mr Paetzold. “It’s much less simple to measure: ‘I trained 10 regulators, and five years later a policy was enacted that protected a billion trees.’”

This new outlook, centred around deeper thinking, is increasingly being deployed by some pioneering wealth managers, although they stress that it is important for the next generation to be prepared for the mindset shift.

Governance models

“The inadequate preparation of the next generation, breakdowns in communication and trust, and a lack of common purpose are key reasons why many business families struggle,” explains Benjamin Vetterli, senior family advisor to ultra-high net worth individuals at LGT Private Banking in Zurich.

To avoid these pitfalls, LGT leans heavily on family governance models and shared learning. It uses case studies from families with similar issues, especially when trying to engage and prepare the next generation. “Our goal is to support families in building strong, lasting legacies that can endure and thrive across generations,” he says.

Increasingly, that legacy is measured by the integrity of its alignment with a family’s evolving vision for a more sustainable, equitable future, in addition to monetary value.

As Mr Paetzold puts it, systemic investing might well be “sustainable investing 4.0”: a step-change for a generation no longer content with doing well or doing good, but determined to do both, at scale.

As private wealth shifts to younger, purpose-driven hands, advisers are increasingly helping families navigate not only this intergenerational transfer of assets, but also the evolution of how those assets are deployed, according to LGT’s Wealth for Impact study.

“We encourage families to prepare and involve their family members early on, and in a number of ways,” says Nina Hoas, Geneva-based head of philanthropy advisory at LGT Private Banking. “For example, by having them help make decisions about strategy or investments, or as board members or co-decision makers.”

LGT says this is part of a broader trend towards embedding values in family governance structures, from philanthropic ventures to impact portfolios.

Thematic focus

Many families now allocate a proportion of their investment or giving capital directly to next-generation members, encouraging them to develop their own thematic focuses. “Something we have seen work very well is to connect families with each other, so they can draw on experiences and best practices from each other,” Ms Hoas adds.

Bridging the gap between a family’s legacy and the personal values of its rising stewards can be challenging, especially when questions about the origins of wealth intersect with broader concerns around inequality.

“We prefer not to discuss ethics as such, given that moral and ethical values are not universal,” says Ms Hoas. “Instead, we help families understand complexities of the socio-economic and political systems they operate under, and define for themselves how they can implement a holistic perspective with respect to their wealth.”

This reframing has prompted families to re-evaluate not only their philanthropic strategies but also the foundations of their financial success. “It’s all about finding alignment,” says Ms Hoas. “Navigating these conversations often involves a delicate balance of respect for achievements and legacy, and a broader understanding around the context of systemic inequalities.”