Political and investment pressures are leading family offices to reassess commitments to ESG strategies within their portfolios.
Family offices are reassessing attitudes to environmental, social and governance (ESG) investments, as wealth managers find new ways to adopt sustainable practices.
There is growing emphasis among family offices on returns from ESG-related strategies, reflecting evolving priorities, according to research from Ocorian, a back-office services provider for wealthy families and individuals.
The study of investment professionals, working for both single and multi-family offices, found near unanimous consensus (99 per cent) that ESG principles are central to investment priorities. In addition, 80 per cent believe integrating ESG considerations forms part of their fiduciary duty.
Yet views on ESG’s role in fiduciary responsibility remain complex and heavily qualified. Around 14 per cent believe ESG qualifies as a fiduciary obligation only if it delivers positive returns, while 6 per cent either remain indifferent or assert that ESG falls outside fiduciary duty altogether.
“Globally, sadly, there are still quite a few that are cynical,” says Lynda O’Mahoney, Dubai-based global head of business development for private clients at Ocorian.
“If I speak to clients, they say, ‘yes we know that ESG may have not had an impact on the investment strategy of our parents or grandparents; it does have an impact on our strategy, however, only if the returns are there as well’,” she adds.
Miss O’Mahoney has not yet met any investors, apart from one Scandinavian family, who say: “We are 100 per cent ESG focused.”
“We're still in a place where the return is more important than the ESG element,” she says.
Ocorian’s international survey of more than 300 family office professionals overseeing approximately $155bn in assets indicates shifting views on the future role of ESG principles over the next three years.
Approximately 61 per cent believe emphasising ESG considerations will remain viable only if such investments generate satisfactory returns, while 19 per cent suggest the focus on ESG is primarily driven by reputational concerns.
“If you speak to many of the family offices, I think some of them will invest in ESG-related kinds of investments to tick boxes,” says Miss O’Mahoney. She acknowledges that, to a degree, it mitigates risk, but the reality is that it is a matter of ticking something off the checklist to say they are doing good.
Negative vibes
ESG has come under the spotlight in a very negative way in the US, following the US presidential election. The state of Texas and 10 other Republican-led states have filed a lawsuit against leading asset managers BlackRock, Vanguard and State Street, alleging their ESG investment strategies have disrupted coal markets. The suit, submitted in federal court, accuses the asset managers of using their market influence to reduce coal production, thereby inflating energy prices and breaching antitrust regulations.
Donald Trump’s victory has brought about more uncertainty, believes Ms O’Mahoney. If he goes ahead with his mass deregulation plans, this might be favoured by many businesses. “He's saying you don't have to tick those ESG boxes; there's less pressure to adopt those ESG practices,” she says. This could mean that profitability begins to take precedence over long-term sustainability.
But such dramatic moves might not work in an environment where the next generation have sustainability and the planet's future on their minds. “I think he's coming up against a generation that, if anybody's going to change it, the incoming generation will,” she says.
Other experts are noticing similar patterns. “What we were observing is that the commitment to impact and ESG investing that families had when markets were more buoyant is something they're less prepared to do now that the return climate is more difficult, and that really they want to have it both ways,” says Rhian-Anwen Hamill, managing partner at RAH Partners, a family business adviser in London. “They want to make impact investments but have high returns,” she adds.
It depends on the nature of the next generation, as they might have a different risk appetite, she says. However, with all generations, she believes any “perceived threat” to the standard of living or future standard of living affects the mindset, meaning ultimately, returns will come first.
But Miss Hamill says families are finding other ways of making an impact on society in the form of venture philanthropy. “Families are willing to make early-stage venture investments with founders in areas like climate or technology, where they stand to lose the whole of their investment,” she says.
This marks another way of looking at ESG and its impact. “It allows families to believe they are changing the world,” she adds.
