ESG sustainability and The Greta effect
Environmental, social and governance (ESG) driven investment continues to rise among the wealthy. The Global Impact Investing Network reported that assets under management in impact-oriented causes jumped from $114 billion to $502 billion from 2014 to 2018. This rise can in part be contributed to a generational change in investment philosophy but there is also a rise in the public conscience because of activists like Greta Thunberg and negative media coverage on climate change which saw BP be dropped from a sponsorship deal with The Royal Shakespeare company. It all means that different touchpoints are causing a trifecta for ESG. Citywealth’s April French Furnell spoke to advisors in the wealth management industry to find out how far advanced the industry is in embracing ESG in their investment strategies to find out about ‘sustainable’ finance.
Eliminating non ESG companies
“In the HNW segment, ESG does seem to resonate more with the younger generation”, said Artur Baluszynski, Director, Head of Research at Henderson Rowe. He explained “The younger generation has demanded greater social and environmental consciousness from the manufacturers of their consumption goods. They are often willing to pay more for a product that aligns with their values. As they come into more wealth, they are also demanding ESG awareness in the companies they invest in.” Interestingly, Baluszynski reported that he is also seeing some older HNW clients who are thinking about passing their wealth onto the younger generation showing interest in basic ESG concepts. What does this look like in practice? “Eliminating companies, they view as falling outside their own bespoke ESG criteria”, said Baluszynski.
Investors lens moves to “temporary custodians”
Drew McNeil, head of client relationships at Wren Investment Office, a London-based multi-family office has also observed this trend of both the younger and older generations becoming interested in ESG. According to McNeil, interest among the older generation stems from “an awareness of the responsibility they have as temporary custodians of the wealth before it passes to the next generation”.
Family offices thumbs up
For family offices in particular, ESG investing has “helped to create a dialogue between generations as family members come together to support a cause”, explained Robert Blower, a partner at Charles Russell Speechlys. He has observed ESG investing rise higher on the agenda of family offices, driven by the younger generation and by the increased awareness around the issue and better rates of return on investments with a good ESG profile.
Using political capital: leveraging relationships
Charlotte Filsell, Head of Client Relationship Management at multi-family office Sandaire added “We are also seeing younger generations, in particular, want to deploy more than their financial assets and to put their emotional, social and political capital to work as well to leave a lasting legacy.”
Indeed, Andra Ilie, senior manager at Family Matters at KPMG observed that “Impact investment is seen by many members of the family, especially the next gen as essential as opposed to a “nice to have”. Things like the emergence of B-corps who are a certification company to help businesses balance profit and purpose and businesses that focus specifically on impact investing such as Tribe Capital, an organisation run by David Scott former MD of UBS in London and also Chairman of investment manager LGT Vestra. These organisations are educating and disseminating an important message in the marketplace and trailblazing what may one day become the norm”.
Further examples include: “Investment in healthcare in countries that cannot afford medical infrastructure or treatment centres, or investment in tech companies who specialise in areas such as reducing waste, generating green energy and inventing alternatives to single use plastics”, said David Bowen, head of private office consulting at Deloitte.
Or it might mean “providing financial equity to start-up companies with a particular focus on ESG – this is an effective way of closely monitoring impact and, in successful cases, can lead to attractive investment performance”, according to Andreas Meier, Chief Investment Officer at Lombard International Assurance.
Trend to private investments not listed
As for risk appetite, McNeil explained, “Investments in listed markets do not have much of an impact because they are purchases of shares in the secondary market. Investors who wish to make a genuinely positive social or environmental impact will do so via private markets and will take on higher levels of risk and illiquidity”.
Murkiness below the surface
Despite the positivity surrounding ESG investment and the growth in demand for it from both the supply and demand side, there is one question that still hangs over it. As Meier observed, “There is a definite lack of clarity for investors on what ESG is and the impact of these investments, both for society and for their returns”. His advice? “Asset managers will need to foster better investor communications on ESG options. They will need to start taking a more hands-on role in guiding their clients to more impactful models of philanthropic spending, as well as explaining the long-term benefits of investing in ESG-focused companies.”
Be a first follower, not a first mover
Phil Dempsey, country head – Ireland at SANNE also raises the flag over how ESG is defined. “When you talk about ESG, it’s a fashionable label but there is no strict definition of what ESG directly relates to. There is a need for a standard definition so that when products are marketed and distributed, there is a clear understanding by investors of what they are investing in”. In his view, “ESG investing, is four of five years away from being the norm”. This is due to the need for a standard definition, as well as more work to be done on the supply side. He explained “One of our clients has a sustainable energy fund. Deal flow is challenging, particularly when many of the future technologies either don’t exist or are very much in their infancy. These tech firms will have an ESG impact into the future. It’s still difficult to determine the impact and returns, but investment research is an important facet of ESG, as well as risk measurement. First followers, rather than first movers, may have the edge when it comes to ESG investing”.
Extinction Rebellion and ESG
One thing is for sure though for investors and investment managers who are moving to sustainable finance and wanting to take time doing so, it remains to be seen if Gen Z and the Greta effect will let them do so. If ‘extinction’ rather than sustainability is on the United Nations and social media agenda, will the investment industry move quickly to partner with the ‘rebellion’ or take a….. cautious view.
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