Investment

Family offices have grown weary of ESG funds. Who could blame them?

Family offices have never been big believers in ESG funds. For one thing, they dislike paying fees so that someone else can control their money. For another, ESG strategies are poorly defined. In short, you could see them as little better than a marketing scam.

For the record, ESG is short for Environmental, Social and Governance, whose funds comprise allocations to companies that tick one, or all three, of the boxes. ESG assets have doubled in scale over four years, to $40 trillion, enriching passive and active managers alike. Their success, for better or worse, means they have become a rallying point for green investors.

Even the SEC, the US regulatory body, is split over how to apply ESG

The Financial Conduct Authority, the UK regulator, is unhappy with the quality of ESG fund launches. In a letter to managers, Nick Miller, head of asset management supervision says: “We are concerned by the number of poor-quality fund applications we have seen.” Noting targets to meet net-zero carbon emissions by 2050, he says: “There are serious long-term consequences if the market does not function properly in the face of the global challenge with which we are presented.”

In its research, the FCA came across a passive fund that used a mainstream index, with few ESG exclusions. It found a strategy promising to make a “positive environmental impact” by investing in low-carbon companies incapable of offering it. It discovered several instances of managers investing in companies with high carbon emissions without providing clear information about them.

The CFA, the industry’s standard setter, has also come across confusion and misunderstandings. Sensible as ever, it has proposed the publication of voluntary standards which mean managers should describe their products as opposed to marketing them through perceptions and narratives. The CFA says the descriptions should be verified by third parties, although it leaves managers with the option of choosing not to use them, but saying so. 

Elsewhere, Edhec, the French business school, has crunched data on ESG assets, and discovered that no more than 12% of their stocks are climate-sensitive. It says: “Speaking of climate investment when climate performance only accounts on average for 12% is at best a misnomer and at worst misinformation.”

A lot of asset managers, however, are merely keen to be seen to be green. Robert Rubinstein, founder of lobby group TBLI once said: “ESG is like a membership card to a fitness club. You can carry the card, but you never need to get on the machines, lose weight or get fitter.”

ESG membership not only makes your funds acceptable, it provides an impetus for anxious investors to climb on board. What more does an aspiring marketer want?

Amid all this, asset managers get involved in endless debates on the taxonomy of different strategies put together by rival lobby groups. Even the SEC, the US regulatory body, is split over how to apply ESG. 

Decisions are continually postponed, not least much-discussed proposals for new accounting standards which put a price on carbon emissions and environmental damage. We might see some progress at this autumn’s UN climate summit in Glasgow, but don’t hold your breath.

And investors are continuing to pour money into ESG even though there is no evidence it is improving the climate. The latest outbreak of floods and droughts actually shows that the climate is getting worse, rather than better.  Scientists put it down to a weakening of the jet stream, far above the earth, as the temperature differential between the poles and temperate regions shrinks. Apparently, climate modelling failed to predict all this. You can’t make it up. 

Family offices deserve credit for largely dodging the ESG bullet. They have tended to back impact strategies, where the contribution you make to sustainability gets more closely defined. Initiatives would include investment in new energy sources, such as nuclear fusion, led by Bill Gates’s $2 billion Breakthrough funds; meat-free food backed by Jeremy Coller’s CPT Capital and Fusion Fuel, a hydrogen maker backed by the Figueira de Chaves family of Portugal. 

Members of a new generation such as Nat Simons, Josh Tenenbaum and James Murdoch are setting up their own family enterprises aligned with sustainable issues. A list of family offices most committed to impact investing was published in Family Capital late last year.  

Networking groups are also raising their profile. Alan Schwartz of Australia’s Trawalla family office has campaigned for a sustainable approach to accounting for profits at Universal Commons.  Toniic provides a link to impact projects in Europe. Justin Rockefeller chairs The ImPact which is committed to investing with a meaningful purpose. Creo Syndicate seeks to meet environmental challenges with the help of its family office members.

A few family enterprises are prepared to take an activist approach, to achieve change. Billionaire Chris Hohn has slammed asset managers over ESG. Late last year, he told Financial News: “ESG for most active managers is a total greenwash and investors need to wake up and realises that their asset managers talk – but don’t actually do.” He said clients should be prepared to sack managers failing to implement a plan to deal with climate issues.

Members of the Rockefeller family have done their bit for activism by steadily divesting from fossil fuels which were the foundation of their wealth a century ago. 

Engine No 1 is a new activist investor-led by Chris James, founder of $6 billion hedge fund group Partner Fund Management, and activist veteran Charlie Penner – which has just won three seats on the board of oil giant Exxon, with the backing of BlackRock. It wants to create a stakeholder-friendly environment at the company aligned to deal with fossil fuel concerns, not far adrift from the kind of values upheld by families and B Corps. 

Jeffrey Ubben is also on the Exxon board. After enjoying success as an activist with Value Act, he has created Inclusive Capital Partners to campaign for a sustainable approach at different companies with the backing of Lynn Forester de Rothschild, chief executive of family investment company EL Rothschild.

Several wealthy foundations have signed up to activist network Climate Action 100+ , a gorilla in the green room, whose 545 signatories include asset owners and managers with $52 trillion. The group is steadily working through a list of companies with a view to improving their approach and extracting promises to achieve net-zero emissions from a string of companies.

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