In spite of the big push for ESG investing, family offices are mainly targeting the easier option of exclusion-based strategies. Also known as ethical- or value-based strategies, these simply look to exclude certain topics such as weapons or pornography from their portfolio.
As regards impact investing, almost half of family offices recently surveyed still prioritise investment performance.
Family offices also trail behind institutional investors on sustainable investing. Equities are not subject to regulation requiring them to disclose environmental and social risks, therefore it is difficult to discern their impact or the amount of greenwashing involved.
Although a recent UBS report on the matter is interesting (“Global Family Office Report 2020”), there are some discrepancies. “Almost two thirds (62%) of families regard sustainable investing as important for their legacies, yet it’s unclear whether good intentions will turn into reality”, but then “… three quarters (73%) already investing at least some assets sustainably”.
What is certain is that most family offices still plan to opt for the easiest option of excluding assets not in line with their values.
About 40% however, are going a different route. They wish to maximise their investment returns through traditional investments and pursue philanthropy separately. One could even pursue the prospect of creating a philanthropic foundation that could possibly be used as a tax write-off.
Also of interest is exploring how integrating ESG factors can mitigate investment risks and improve investment performance. Exclusion based strategies are in about 30% of family office portfolios.
From an asset class perspective, equities are the most common place to invest sustainably in all strategies except impact investing. For impact investing, private equities are the way to go, since direct ownership allows investors to make a more deliberate environmental and social impact with their capital. All three types of sustainable investment can be better managed with fixed income instruments.
Consumer demand has also impacted business performance. As environmental issues become more important, customers pay more attention to how businesses affect and respond to environmental issues, which in turn reflects back to profit.
When it comes to impact investing, family offices (esp. In the USA and Asia) put competitive rates of investment return first. Impact Investing is the most ambitious strategy of all, as it aims to make direct, positive change; for instance, curing diseases across entire regions or raising literacy rates. For this reason, two thirds of family offices view defining and measuring impact as a big challenge. There are no common standards, nor is there a widespread adoption of principles.
Over half of those surveyed stated that they were happy with their current approach, and only a third employ specialists who can analyse ESG risks.
The NextGen are most likely to increase the level of sustainable investment, as they have a greater affinity for it than the older generation. Almost two-thirds consider themselves as engaged, compared to less than half 47% of their parents.