ESG investing is very much on the family office agenda

Environmental, social and governance-led investing is increasingly popular with family offices and has become shorthand for an investment strategy that aims to integrate sustainability and ethics with capitalism.  It’s particularly popular among the millennial generation, those born between 1980 and the early 2000s, and its an increasing subject for debate within family office investment committees.

UHNW millennials, according to research firms such as Scorpio Partnership, embody their very own ideas of sustainability and ethical business, and prefer investments that possess a similar sense of responsibility to the wider community.  They want to invest, not only because it makes financial sense, but because it is the right thing to do.  This is important not least because some $24 trillion is expected to be under the control of millennials by 2020.

Indeed, the trend towards sustainable investing is already apparent, with Rockefeller Capital Management chief Greg Fleming saying recently: “Millennials are actually going to treat ESG investing as something that’s important to them forever”.  Companies are responding by signing up to ESG Indexes, such as the Thomson Reuters Diversity & Inclusion Index, to formally demonstrate they are compliant with ESG criteria. Yet more are going beyond diversity and inclusion to areas such as reporting on gas emissions or aligning with the UN’s 17 Sustainable Development Goals.

What’s more, importing “social justice” aims such as diversity and inclusion have seen pushback from intellectuals such as Jordan Peterson

Responsible investing has, until recently, been considered an underperforming niche. Traditionally managers screened out businesses that investors disapproved of, such as arms manufacturers, tobacco makers or oil companies, and clients accepted this strategy was likely to limit returns.

But ESG is quantitatively and qualitatively different, its proponents argue, because the new socially responsible investing doesn’t forgo gains, rather it creates an avenue to make companies more attractive to consumers and easier to retain sought-after talent.  As Kleinwort Hambros CEO Eric Barbett has said: “Social responsibility is not just a passing fashion and the economic benefit is real.”

Single family offices are investing in ESG, such as Blue Haven Initiative, which is a member of the US Impact Investing Alliance.   At the UK-based TY Danjuma Family Office, CEO Simon Foster says how ESG permeates their investing across all asset classes: “In public markets, we use ESG screening and strong prohibitions against ‘sin’ assets.  In property investing social impact is heavily considered, for example, we have used novel construction techniques for environmental considerations.  In the family’s African private equity investing the provision of employment is a major social aim.”

Others offices are finding that while there is some enthusiasm among family members, there is also a generational divide, with older members of the family suspicious of millennials passion.

Also, there has also been some broader critique.  After all, critics argue, one man’s arms trader is another man’s defence expert and integrating your personal political philosophy into business can be complicated.  For some, “socially responsible” investment might mean boycotting Israel, which to others smacks of hypocrisy and anti-Semitism.

What’s more, importing “social justice” aims such as diversity and inclusion have seen pushback from intellectuals such as Jordan Peterson, who argue it’s part of a broader leftwing attack on meritocracy and will harm productivity. And some campaigns for social justice have become associated with a moral self-righteousness that some activists, including actor Stephen Fry, see as ideologically-driven and dangerously censorious.  There are also long-term question marks over whether millennials will mellow with age, and the profit motive will return to the fore.

In the meantime, ESG is firmly on the family office agenda.

Keith Johnston is CEO of the Family Office Council, a membership group for single-family offices based in London