Environmental, Social and Governance Investing Trend
Several indicators highlight an inevitable trend of family offices increasing allocations to ESG- (environmental, social and governance) focused funds and companies in the near future.
To understand the trend, let’s begin with the overall spike in the prevalence of environmental, social and governance investing. As research continues to suggest that ESG investing is not only socially responsible but fiscally advantageous, businesses and investment groups have been modeling their strategies and portfolios with an emphasis on ethics - the argument is that, by tailoring their efforts in such a manner, they are simultaneously creating a more sustainable strategy. Jerry Dodson’s Parnassus Endeavor Fund, comprised solely of ESG companies, serves as an example of ESG investments yielding quality returns.
Running parallel to the ESG boom is an increased demand for responsible investment vehicles, particularly within the family office market. In the wake of the recession, family office numbers have spiked, thanks to the proliferation of younger high-net-worth individuals setting up their own offices. This new generation of successful individuals, unlike their predecessors, were brought up with an ever-present awareness of environmental and ethical issues. Data derived from FINTRX family office research illustrates that these newly established family offices, coupled with a generational change of hands in existing family offices, is resulting in a lower average age of decision makers within the space. This new generation has already begun to stray away from the “old-school” ways of their parents and predecessors, and will likely continue to do so.
This trend certainly isn’t groundbreaking and has already been addressed by the majority of significant players in the financial world. Firms such as Fidelity and Vanguard, understanding the widespread demand for ESG investments, have launched ETFs comprised of securities they deem responsible. Additionally, groups like Goldman Sachs and Merrill Lynch are educating their asset managers on different ways to implement ESG investing, and the advantages of doing so. In essence, what began as a group of individuals looking to invest in socially and environmentally responsible companies has now become a quantitatively effective form of capital allocation.
Ultimately, given current trends in both the global family office dynamic and ESG investment vehicles, the lag in family office exposure to ESG investing, compared to the rest of the market, is likely to correct itself over a short period of time and in the very near future.