July 22, 2019

Trends in family office ESG investment

Trends in family office ESG investment

We all know ESG investment is a hot topic right now. The statistics vary wildly, but the Global Sustainable Investment Review 2018 is cited most often and valued the ESG investment market at a cool £23 trillion in 2016, up 25% from 2014.

Let’s quickly define what is meant by ESG, SRI, and impact investing.

ESG - Investment strategies that incorporate environmental, sustainable, and governance aspects. ESG is also known as sustainable investing. Any of the three components can be used individually or combined into a single investment.

SRI - Socially responsible investing is investing in companies that do overall good for the world, rather than harming it. Some examples are companies that give back to the community, use clean energy, and do not sell products that are addictive or impair people.

Impact investing - Encompasses ESG and SRI. Impact investing is investing in companies or funds that do social and environmental good while, at the same time, generating a positive return for their investors.

 

So what’s the uptake of ESG investing by family offices? Well, over 1 in 3 family offices engage with sustainable - or ESG - investing, according to the Campden Global Family Office Report 2018. The report also reveals that nearly half would increase their sustainable investments over the next year. Recent research, also from Campden, estimates that family office’s manage assets of £5.9 trillion: family offices are a force in ESG investment.

What’s driving the demand in sustainable investing? Firstly, it’s a trait common among Millennials that they want to solve the world’s biggest problems. “In particular, we’re seeing younger members of families asking for ESG options more and more often, ”said Mamadou-Abou Sarr to ai-cio.com, director of product development and sustainable investing at Northern Trust Asset Management. When the next generation assumes control expect even more focus on sustainable investing: 39% will increase their investment in impact and ESG investing, says the Campden Global Family Office Report 2018.

Secondly, sustainable investing does not mean poor performance. Half of the institutional investors surveyed in a recent study from UBS and Responsible Investor said that returns were better from ESG investments. It’s a smart way of mitigating risk too: companies meeting ESG criteria are less likely to fall foul of reputational damage or be restricted by future regulation, making them solid long-term investments.

Thirdly, wealthy families have always wanted to give back. Their size and influence of their charitable foundations are a testament to this. ESG investment is a means of doing good and making money.

Finally, a happy by-product of this enthusiasm for sustainable investing is that it helps recruit for the family office. New finance graduates want to tackle societal and environmental problems and, what’s more, impact investing is fashionable. “You can punch way above your weight in terms of talent if you’re doing impact investing,” John Goldstein, a managing director with Goldman Sachs Asset Management, said to the Financial Times

The Campden Global Family Office Report 2018 shows that it’s not just environmental causes that garner support. Education remains the number one priority for those family offices that invest in impact (51% of them back educational initiatives). There’s now a larger focus on community as ‘housing and community development’ rose from a ninth-place ranking in 2017 to second place in 2018 (49% of impact investors support it). Minority-led and gender-lens investing have become increasingly popular. ‘Women’s empowerment’ moved up from seventh place to fourth (with 43% supporting it).

The desire to invest in companies that adhere to environmental, social and governance criteria has never been stronger. However, major challenges remain. With ESG being such a buzzword, it’s no surprise that everyone is using it to sell their funds - and sometimes misleadingly. Vanguard’s ESG EFT has been in the press after claiming it does not invest in fossil fuel stocks but was found to be heavily involved with oil company stock. Most recently, a BlackRock EFT fund despite stating it “excludes issuers involved in controversial sectors” has been found to be investing in Saudi Aramco and bonds issued by Saudi Arabia.

Family offices are keen to invest further in ESG. Yet, they need confidence in their investments which calls for thorough due diligence, robust reporting and a reliable means of measuring impact. There’s no doubt the ESG market will continue to thrive but there must be greater transparency to underpin this growth.

We’d like to hear about your experiences - positive and negative - of sustainable and impact investing. We can also share how we are helping family offices overcome their ESG investment hurdles. Get in touch at contact@finlight.com or join the conversation on social media.

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