Investing with Purpose: How Family Offices Can Manage Risks in Direct and Impact Investing

After the 2007–2009 recession, mortgage crisis, and the 2009 Recovery Act, family offices started seeking more control over their investments and began embracing two key strategies: direct investing and impact investing.

Impact investing, as defined by theimpact.org, means including social and environmental factors in investment decisions. The goal is to create both financial returns and positive social impact for family investments. For example, a family office might invest in a sustainable building project in their community or support a fair-trade product.

Direct investing is just what it sounds like: families invest directly in companies or real estate without using a third-party manager. This approach gives families more control and often means a longer-term commitment than what a private equity firm might offer.

These approaches give families more control and help better align their investments with their values, whether social or environmental—something many became more aware of after the rapid changes in investing during the 2000s.

That said, like all investments, these strategies come with risks. For both direct and impact investing, the risks can be complex. Family offices thinking about or already using these approaches should understand those risks and be ready to manage them to help protect their wealth over time. As Warren Buffett said, “Risk comes from not knowing what you’re doing."

Let’s take a closer look at these two common strategies used by family offices, understand them better, and consider some of the risks involved.

Direct investing: More control, greater responsibility

Direct investing is popular with many family offices because it offers more influence over decisions and the chance for higher returns. Our recent Family Office Benchmarking Study shows that while this strategy is common, it could also expose families to greater management and professional liability risks.

Family offices considering direct investing should ask themselves:

• Do we have the specialized expertise and deep knowledge needed to make smart decisions in this sector?
• Should we bring in an external advisor with relevant experience?
• Are we ready to handle the extra cost and complexity of working with an outside advisor?
• Do we know how to structure deals, value investments, negotiate terms, and conduct thorough due diligence?
• Can we set up clear governance and decision-making processes that align with family goals?
• Do we have the capacity to manage operational demands?
• Are we prepared to handle regulatory compliance on our own?
• Are we aware of any reputational risks tied to this company?
• Can we manage those risks to protect the family’s reputation?

Direct investing may offer families a chance to support companies and causes they care about while potentially earning returns. But as these questions show, it requires expertise, time, oversight, and careful due diligence.

When done well, it may be rewarding—and fulfilling. For example, KIRKBI, the private holding company of Kirk Kristiansen from the LEGO® family, invests directly in projects focused on circular plastics. This fits with the materials LEGO uses. KIRKBI has built a dedicated investment team with deep knowledge in this niche, though they admit they’re still learning as they go until everything “clicks in place.”

Impact investing: Measuring social and financial success

Impact investing aims to create positive social and environmental effects alongside financial returns. This approach allows family offices to reflect their philanthropic values while addressing issues important to them, such as climate change, social inequality, and sustainable development.

Marsh McLennan’s Private Client Benchmarking Study shows that impact investing is becoming a higher priority for family offices, especially driven by next-generation family members who focus on sustainability and measurable social outcomes.

Family offices considering impact investing should ask themselves:

• Do we have the interdisciplinary expertise to evaluate social and environmental impact?
• Are we comfortable managing uncertainties that come with fields like renewable energy or social enterprises?
• Can we handle regulatory and scalability challenges in the energy or social sectors?
• Can we set up committees to oversee both financial and impact performance? Research from Marsh McLennan Agency finds that family offices with dedicated impact governance feel clearer and more confident about their impact results.
• Will we use frameworks like IRIS+ or GIIN’s Impact Reporting and Investment Standards (IRIS) to maintain transparency?
• Are we prepared to manage regulatory risks?
• Can we handle reputational risks and avoid “greenwashing” to keep our family’s message authentic?

Impact investing requires strong management, governance, measurement, and knowledge of frameworks and performance standards. When done well, it may help build a positive family legacy that aligns with values and creates a ripple effect of good in the community or sector invested in.

A public example is the Gates Family Foundation. As of 2023, they have committed more than $69 million in impact investments since they began making mission-aligned investments in 2014, and impact investment commitments currently account for 12 percent of their endowment.

Managing risk while doing good

Whether focusing on direct investing, impact investing, or both, family offices may wish to consider these four tips to help manage risk:

1. Develop an investment policy statement (IPS): An IPS outlines investment goals, risk tolerance, and decision-making processes. Our recent benchmarking report shows that family offices with an IPS tend to make more disciplined investment decisions.
2. Establish strong governance: Clear governance structures and impact committees with defined roles help ensure everyone is aligned from the start.
3. Conduct due diligence: Carefully evaluating financial and impact factors before investing is essential.
4. Diversify investments: Spreading investments across sectors, interests, regions, and asset types may help reduce risk.

Unlocking the advantages of partnering with a broker

Direct and impact investing are popular ways for family offices to pursue financial returns while reflecting their values. But these strategies come with risks and require careful oversight and expertise. By adopting clear policies, strong governance, thorough due diligence, and, when needed, expert support, family offices may be able to better manage these risks.

Our team is here to help you understand the risks you face and offer guidance on how to address them. Schedule a risk review today to see how your impact or direct investing might affect your insurance needs and support your efforts to protect your family’s wealth and legacy over time.