Family Values and Sustainable Finance

One of the most important missions of family offices is to serve as a repository and guardian of family values. This carries, in essence, the same weight as preserving the family’s assets or planning for wealth transition.

Family values establish the principles and standards its members live by and provide inter-generational cohesion. They lie at the core of the family’s history and embody its distinctive identity. It is therefore very common for family offices to adopt practices and set up governance bodies to ensure that family values are properly communicated, protected and followed.

Still, not all families have been successful. Some have struggled to instil its members, mainly the younger ones, with a set of common principles and a sense of shared purpose. Internal silos may develop and values may end up being regarded as formalistic, generic or superfluous.

Sustainable finance builds an aqueduct between generations

Sustainable finance, an investment discipline where profit-driven allocations use a set of environmental, social and corporate governance (ESG) criteria to choose securities for investment, has the unanticipated effect of contributing to the preservation of family values across generations.

How?

Firstly, sustainable finance and its multiple subtypes (“responsible investing”, “screening” or the niche “impact investing”) enable the alignment of family values with asset management. Values gain a new materiality when they are not simply regarded as a family canon but, rather, as a business practice. As we saw in a previous article, it is possible to design a full investment portfolio with only ESG products and in all asset classes, from equities to alternatives.

Let’s take an extreme case. If a family generated its wealth from the oil business and if its traditional holdings are at odds with family values, sustainable finance could provide viable alternative routes such as investing only in oil companies with superior ESG performance (“responsible investing”), buying into renewable energy companies (“thematic investing”) or disinvesting from oil companies that fuel governments that violate human rights (“negative screening”).

Sustainable finance is composed of a dozen investment methodologies that provide opportunities for bespoke value-aligned and profit-driven investment solutions. As we pointed out earlier, sustainable finance returns often beat the market.   

Secondly, it equips family members with tools to preserve internal unity and harmony and prevent inter-generational discord. Often family members have their own generational perspectives on wealth. Studies indicate that the older the family member, the less likely it is for him/her to be inclined towards social and environmental impact.

Preserving wealth, more than just preserving money, is therefore about safeguarding the fundamentals and the longevity of a family

According to a recent US Trust report, 84% of millennials agree that social or environmental impact is important to investment decisions, compared with 71% of Generation X and 55% of baby boomers. Family patriarchs or matriarchs who originated the family wealth may also ascribe greater importance to capital preservation than younger members who may have simply inherited it. Inter-generational differences may bring about estrangement or outright bitterness.

Sustainable finance builds an aqueduct between generations. While it provides older generations with sophisticated profit maximization strategies and products, it also integrates the social and environmental considerations that younger generations so much value. Social finance is about combining value with values.

Thirdly, it provides new options for the family’s social responsibility mission. When families demarcate their values, very often the endeavour to share the benefits of their activities with those less fortunate is enumerated as one of them. But it is also too common for that principle to be materialized solely through philanthropy.

The practice carries paramount importance, but it is frequently regarded as marginal within the family office’s infrastructure, cut off from its daily activities and overall priorities, and conducted by a reduced number of family members only. This is reflected in the latest Global Family Office Report: while 63% of family offices consider intergenerational wealth management very important, only 13% attribute the same level of importance to philanthropy.

Sustainable finance is not meant to replace philanthropy. While the first is about making money, the latter is about donating it. But it adds mileage to the family’s social responsibility mission and bestows it with meaning and muscle.

Wealth may be simply defined as money plus values. Preserving wealth, more than just preserving money, is therefore about safeguarding the fundamentals and the longevity of a family. Traditional strategies to maximize the family’s money may have no impact on the consolidation of values, while strategies to conserve values generally contribute little to investment solutions. Sustainable finance addresses this conundrum by providing a viable solution to advance both.  

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).