Environmental, social and governance (ESG) considerations are racing up the agenda for asset managers and corporates alike – and family offices are no exception.
Family offices and private clients are increasingly wanting to see their personal values reflected in their investments, with some even developing their own philanthropic structures to drive the specific change that means the most to them.
While ESG is gradually finding a place within investment portfolios around the globe, there is an appetite for sustainable solutions among wealthy families.
UBS’ Global Family Office Report found that sustainable investing is firmly entrenched in portfolios, as more than half (56%) globally have allocations, with family offices in Western Europe and Asia leading the way. And this trend is set to continue – in the next five years, family offices have the power to use their flexibility to lead the way on adopting ESG integration and are reportedly planning to increase their allocation to ESG strategies to about a quarter (24%) of their overall portfolio.
According to RBC Wealth Management’s Family Office Report, in 2021, the total global family office AuM is estimated at upwards of $424bn. As a result, many family offices are now managing private wealth at levels to rival institutional investors. Therefore, how this capital is invested and deployed is becoming crucial to safeguarding the planet’s future.
It is important to note however, investments badged as ‘ESG’ or ‘responsible’ should not always being taken at face value. Families are paying closer attention to the companies they are investing in; requiring more sophisticated evidence of positive practices and sustainability as opposed to ‘greenwashing’.
Due to this fast-evolving landscape, family offices and wealth managers must get up to speed. The growing client appetite in this fast-paced sector needs to be met with a suitably diverse range of sustainable investing solutions, supported with external expertise and skillsets.
To keep pace with these changes, family offices are also seeking to restructure, with innovation at the heart of this evolution. Although the development of new technology was in train long before the pandemic, its arrival has accelerated adoption. With social distancing measures in place around the globe, family offices have been quick to harness virtual technology. This was not solely to ensure continued communications, but also to enable trade executions, data storage and report creation. Though initially introduced as a temporary measure, many of these practices are here to stay, reshaping the way family offices manage their money.
There are further factors at play here, too. While prudent intergenerational planning has long been a core objective for family office clients, the great global wealth transfer is shining a brighter light on the matter than ever before – over the next couple of decades, trillions is set to pass between generations. It’s no secret that younger family business leaders tend to be more acutely aware of the need to embed sustainable practices than their elders. As such, senior family members are acknowledging the concerns of their offspring, promoting a rethink in how family investments are structured.
So what else is driving ESG adoption by private clients and family offices? The main factor is the growing awareness that everyone has a part to play in building a better future for our planet – tackling climate change is not a spectator sport. People are aware that action must be taken, and immediately.
At the same time, we also must recognise that private wealth planning is a complex and deeply personal affair. Not everyone views making a positive difference through the same lens. This means that wealth managers and service providers must work closely, as an extension of the family to establish and understand the personal values as well as the financial goals of each client.
Many families are clear about the specific positive impact they would like to make. This is resulting in philanthropic ventures such as forming their own charitable structures through which they can invest directly in socially or environmentally conscious initiatives, including building schools, funding conservation and reforestation programs to support biodiversity, or seeking to eradicate diseases through clean water programmes.
The relationship between service providers and their Private Clients is essential to building a sustainable future. It is through these conversations that significant quantities of capital can be directed towards tackling some of the biggest threats to the health of people and planet. It’s becoming increasingly clear that clients across the wealth spectrum have broader objectives than purely seeking the investments with the highest returns. After all – what is the point in generating returns for future generations, if they are living in a world damaged irreparably by the climate crisis?
As some of the most dynamic and flexible asset owners, Family Offices have the opportunity to lead the way by proactively integrating ESG principles to their portfolios and investment approaches. People care about the cultures and behaviours of the companies they are investing in, and service providers are perfectly placed to offer the expertise and tools to help Private Clients to direct their wealth into ESG-compliant strategies that work best for both for them and their families.
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