The evolution of ESG adoption
Citywealth speaks to Lucia Perchard, Global Head of Product, Family Office at global financial services provider Apex Group to learn more about how adoption of ESG is evolving and how it will change in the year ahead.
How adoption of ESG is evolving in the sector and how it will do so in the year ahead?
The Family Offices and Private Clients we administer are increasingly wanting to see their personal values reflected in their investments, ensuring that they evaluate the ESG performance of their current portfolio and future investments. Some even developing their own philanthropic structures to drive the specific change that means the most to them. ESG is no longer a nice to have but is becoming essential for family offices, especially as the next generation in family offices are keen to be seen to be acting beneficially for others and the planet so want to ensure that their investments are in line with their values but generating returns.
Family offices and businesses have been investing in line with their values for some time they are just now more visible in undertaking this as ESG strategies have come to mainstream prominence. UBS’ Global Family Office Report found that sustainable investing is firmly entrenched in portfolios, as more than half of family offices (56%) globally allocating to ESG investment. Family offices in Western Europe and Asia leading the way. This trend is set to continue – in the next five years, Family Offices have the power to use their flexibility to lead the way on adopting ESG integration and are reportedly planning to increase their allocation to ESG strategies to about a quarter of their overall portfolio.
In your experience, what ESG programmes are delivering results?
Many families are clear about the specific positive impact they would like to make. This is often takes the form of philanthropic ventures such as forming their own charitable structures through which they can invest directly in socially or environmentally conscious initiatives, including building schools, funding conservation and reforestation programs to support biodiversity, or seeking to eradicate diseases through clean water programmes. However, ESG is not limited to philanthropic ventures, it can also be an increased awareness of the ESG characteristics performance held by a family’s portfolio of underlying businesses, funds or investments.
The relationship between service providers and their Private Clients is essential allocating capital to deliver tangible outcomes. It is through these conversations that significant quantities of capital can be directed towards tackling some of the biggest threats to the health of people and planet. It’s becoming increasingly clear that clients across the wealth spectrum have broader objectives than purely seeking the investments with the highest returns.
How do ESG investments deliver social impact and concrete solutions?
ESG investments seek to generate maximum positive social and environmental impact alongside financial return. Examples of this, could be a family allocating capital to a renewables fund, which is accelerating the transition to a lower carbon economy.
Being able to collect and analyse ESG data is essential to understanding, quantifying and ultimately maximizing the positive impact of investments. Rigorous measurement and interpretation of ESG performance remain key challenges for the investing industry. Widely-recognized impact frameworks and targets, such as the UN Sustainable Development Goals have been designed for nation states rather than companies, creating challenges for investors to demonstrate positive impact on the ground
ESG impact is multi-dimensional and complex, requiring a range of qualitative and quantitative data to assess comprehensively. Each company a family office invests in, needs a tailored approach, with impact performance data collected customized to its activity and unique context – as well as analysis to show where there are areas for improvement.
How does ‘greenwashing’ impact ESG investments?
Of course, 2022 has been the year of “greenwashing”, with regulators, media and other stakeholders holding funds to account on their ESG credentials. As such, families are realising that investments badged as ‘ESG’ or ‘responsible’ should not always being taken at face value. Families are paying closer attention to the companies they are investing in; requiring more sophisticated evidence of positive practices and sustainability. This shows that due to this fast-evolving landscape, Family Offices and wealth managers must get up to speed. The growing client appetite in this fast-paced sector needs to be met with a suitably diverse range of sustainable investing solutions, with robust ESG practices, supported with external expertise and skillsets.