In the world of sustainable finance, family offices are regarded as latecomers, not trailblazers. The incorporation of environmental, social and corporate governance (ESG) criteria in asset management to generate long-term competitive financial returns and positive societal impact has expanded to $ 23 trillion assets under management (of a global total of $ 85 trillion). But the transformation has been spearheaded mostly by institutional investors and asset managers, not family offices.
Families are gradually catching up and realizing the upside of taking the path of sustainable finance
This may change. Families are gradually catching up and realizing the upside of taking the path of sustainable finance. The Global Family Office Report 2018 shows that 38 percent of them report being engaged in sustainable finance, and nearly half plan to increase their sustainable investments over the next 12 months. In addition to this, virtually all larger private banks, wealth management companies, and multi-family offices are sprinting to create autonomous platforms with ESG products (e.g. Morgan Stanley’s Investing with Impact Platform) or merge ESG considerations with traditional platforms. Wealth managers are also quickly educating themselves to respond to their clients growing appetite for ESG investments.
The push is largely attributed to five factors:
One: Demonstrable positive correlation between sustainable finance and higher returns. If you invest only to maximize financial returns, then sustainable investing may be a good option for you. Dozens of studies and indices have shown the positive correlation between ESG and alpha. MSCI EM ESG Leaders, for instance, which provides exposure to companies with high ESG performance relative to their sector peers, has beaten MSCI Emerging Markets in annualized gross returns by +1.27% (3 years), +2.67% (5 years), and +3.69% (10 years).
Two: Positive relation between ESG integration and risk management. Research on risk is less copious, but indices are still a good source of insight. MSCI EM ESG Leaders has generated lower standard deviations by 0.33% (3 years), 0.63% (5 years), and 1.12% (10 years) than its comparable index. Juxtaposing the global MSCI ACWI and MSCI ACWI ESG Leaders will yield similar conclusions.
Three: As the market matures, ESG is being applied to a wider range of asset classes and investment products. The time when sustainable investing was about green buildings, solar plants, and small specialty funds is long gone. Presently, you may invest in all assets (equities, fixed income, alternatives etc.) through ESG lenses. There is still need for a fully-fledged derivatives market and some alternative products, but building a full ESG portfolio with superior returns is increasingly attainable. ESG public equities, development bank bonds, and green bonds, just to give a few examples, are growing exponentially.
Four: Ethically-minded millennials (born 1980-2000) moving up through the family ranks. 85% of them agree that social or environmental impact is important to investment decisions, compared with 70% of Generation X and 49% of baby boomers. By 2020 millennials may control up to US$ 24 trillion, estimates Deloitte – it is the largest intergenerational wealth transfer ever. Unsurprisingly, demand outweighs supply of ESG classes in business schools worldwide, compelling faculty to refresh MBA curricula.
Five: A growing inclination to align family’s values with investment decisions. Very often portfolios and principles do not go hand in hand. Differently, ESG investing allows families to harmonize their investment strategy with their values helping to cement internal cohesion and solidify intergenerational bonds.
Simon Smiles, UBS’s CIO for UHNW and member of the bank’s global investment committee, raised an additional point in an interview to this column: their wealthy client entrepreneurs have started to regard sustainable business practices “as a mandatory requirement rather than a voluntary practice”. Therefore, “if they can drive positive social and environmental impacts and the financial performance of their own companies in unison, it makes complete sense to want to try and do the same thing with their investment portfolios.”
Sustainable finance is here to stay.
Rodrigo Tavares is founder and president of the Granito Group, a company that advances the sustainable economy through management consulting, financial advisory, and policy & research. He was nominated Young Global Leader by the World Economic Forum (2017).