Family offices and sustainable finance: from intention to implementation


Consulting firms and financial players like UBS, Capgemini, Credit Suisse, EY, McKinsey & Co. or U.S. Trust publish sought-after annual reviews of the private capital ecosystem (family offices, HNWIs, private banking). They are modern oracles on the future of the industry.

Something that crosscuts most of them is the attention in the last few years that is given to sustainable finance, an umbrella term that encompasses all investment disciplines that blend the pursuit of profits with environmental, social and corporate governance (ESG) considerations. For a conservative industry like financial services, so often immune to change, sustainable finance has gained an unexpected clout in recent years.

In 2017 $ 23 trillion of $ 85 trillion global assets under management were managed through sustainable finance lenses, corresponding to a 25 per cent annual growth. The figures for the US alone – just released by US SIF– are even more eye-catching. AUM using sustainable finance strategies grew from $8.7 trillion in 2016 to $12 trillion in 2018, an increase of 38 per cent. This represents “26 per cent – or 1 in 4 dollars – of the $46.6 trillion in total US assets under professional management.”

If compared to pension funds and other institutional investors, family offices and private capital had a late arrival into sustainable finance. But they are catching up quickly. According to the latest US Trust Insights on Wealth and Worth, 80 per cent of HNW investors say they expect companies to make a profit but also take responsibility for their impact on the environment and society.

In previous articles, we have dissected the different investment disciplines grouped together under the common heading of sustainable finance and explored the reasons why family offices are gradually stepping into sustainable finance. Moving from intention to implementation carries some challenges, however, given the particularities associated with having non-financial ESG data incorporated into the investment process for the first time. And, therefore, a recurrent question posed by family offices is related to the means: what does it entail to adopt sustainable finance methodologies? What would the process be like?

The first step in the journey is necessarily related to the education of family members, bankers and officers on sustainable finance. Most of them are not yet experts on the concepts, methods, risks and opportunities related to sustainable finance and the impact economy. In fact, a CFA Survey indicated that “insufficient knowledge of how to consider ESG issues” is one of the most cited reasons for not engaging with sustainable finance. It is therefore important for family offices to invest in education and go beyond “learning by doing” quick fixes.

The second step is about understanding the family office investment process and identifying existing ESG practices and products. It sometimes occurs that family offices have instinctively, and even involuntarily, applied some ESG tools and strategies, such as negative screening of some sin assets, without being familiar with the sustainable finance terrain. It is therefore critical to canvass perceptions, knowledge, values and asset management strategies to pinpoint where the family office is at. This is generally conducted through quantitative and qualitative research.

In the third step, the office starts taking sustainable finance in. The integration of ESG policies and practices presupposes the designing and implementation of a multi-year Sustainable Finance Strategy, with various types of investment approaches, varying from “responsible investments” and “screening investments” to “impact investments” (see the Impact Economy Glossary). It is also in this phase that the family office starts the process of ESG portfolio construction, with alpha sources, and implements a risk methodology with a focus on sustainability. Paired with this, ESG non-financial data is integrated into analysis and valuation and ESG data providers are assessed and selected.

The fourth and final step is linked to the communication of sustainable finance policies, strategies and outcomes internally and externally. It is important to have standardized reporting systems in place to track trends, identify patterns and assess potential risks.

Family offices have different ways of seizing sustainable finance opportunities. Some are happy with the light touches of negative screening (exclusion of certain sectors, countries, companies or practices based on specific ESG criteria), whereas others prefer to invest in specific products (specific equities, specific funds, specific ETFs, impact investing) or to allocate a specific percentage of the portfolio to sustainable assets.

Sustainable finance is, however, malleable and comprehensive providing even effective solutions to money managers that may be exclusively focused on maximizing returns and care little about positive impact. The trend is, therefore, to move beyond product selection and to start integrating sustainability in a coherent way across the entire portfolio.

Larry Fink, BlackRock’s chairman and chief executive, the world’s largest asset manager, has recently given an interview to FT saying that “sustainable investing will be a core component for how everyone invests in the future.” All financial players, including family offices, indeed need to gradually adjust investment practices and strategies to remain competitive.

The clock is ticking.

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).

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