The Rise of ESG & Impact Investing Among Family Offices

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ESG factors have always been a consideration for businesses and family office investors, but it wasn't until the last decade or so, awareness of these topics skyrocketed. Investing for social good has a rich history dating back thousands of years, as people have long invested based on their values. With that said, data shows a clear increase in ESG investments over the past decade especially.

Introduction

Until the mid-2010s few investors paid attention to environmental, social, and governance (ESG) data—information about companies’ carbon footprints, labor policies, board makeup, and so forth. Now, amidst a global pandemic, this trend remains strong among family offices. Given the heightened public and investor focus on social and environmental outcomes, these private wealth vehicles are increasingly looking to incorporate ESG investments for several reasons. With so much pooled capital involved, family offices now rank with pension funds and institutional investors in the ESG world. Some say they may even be more important because they have the funds, flexibility, and expertise to make savvy investment decisions.


ESG Investing: An Overview

ESG considerations widen the scope of investment goals to include benefits for society. Simply put, ESG is a way for investors to apply non-financial measures when looking at the risks and growth opportunities of any company. The E in ESG, environmental criteria, includes the energy a company takes in, the waste it discharges, the resources it needs and the consequences. E encompasses carbon emissions and climate change. The consideration of people and relationships falls under the “S” or social component, including gender and diversity issues, human rights and labor standards, among many others. And finally, governance refers to the standards for how a company is run - board composition, bribery and corruption standards, executive compensation, or lobbying, for instance.

The Financial Times Lexicon defines ESG as “a generic term used in capital markets and used by investors to evaluate corporate behavior and to determine the future financial performance of companies.” Investors use ESG to evaluate businesses and determine the future financial performance of companies. ESG investments include sustainable, ethical, and corporate governance issues such as managing a company’s carbon footprint and ensuring there are systems in place to ensure accountability.

Quick Hitters:
  • - About 20% of family offices (in the FINTRX platform) demonstrate ESG interest
  • - ESG practices are part of a long-term investment strategy (this is favorable to family offices)
  • - You can find sustainable investing solutions across all asset classes, both public and private 
  •  
Three main areas where ESG topics matter to investors:
  • 1. Managing investment and portfolio risk
  • 2. Taking part in the upside potential of disruptive innovation
  • 3. Engaging with the prevailing social and political agenda

Reasons for Spiked ESG Interest Among Family Offices


1. Increase in public awareness amid a global pandemic

In a world that increasingly judges family office investors on their ESG performance, they must look to more-fundamental drivers—particularly strategy—to achieve real results. Regardless of where the pressure originates, companies find that ignoring their social and environmental responsibility and impact is ultimately bad for business.

2. Increased pressure from next-generation family members

The push to make investment decisions with an impact is mostly driven by younger generations. For younger family members, what is key is aligning investing with the values of the family.

3. Ability to capitalize on a socially responsible future

Socially responsible companies cultivate positive brand recognition, increase customer loyalty, and attract top-tier employees. These elements are among the keys to achieving increased profitability and long-term financial success.

4. Use of AI & alternative data provides the ability to uncover ESG data trends

Advancements in artificial intelligence and machine learning will allow intelligent machines to leverage these new modalities and make optimal decisions.


How Covid-19 Has Impacted ESG Investing

The outbreak of Covid-19 has proven to be a major turning point for ESG investing, or strategies that consider a company’s environmental, social and governance ratings alongside traditional financial metrics. 2020 proved that this topic has entered the mainstream—not just as a talking point, but as a driver of valuation and a catalyst for action. It’s unknown whether ESG issues will remain as salient to investors in the coming years, but our bet is that they will.

“Prior to this crisis there was a meaningful and increasing focus on ESG investing and it is likely that this focus will only increase following the coronavirus...” Goldman Sachs said in a recent note to its clients

From an environmental perspective, we see this crisis bringing even greater attention to the impacts of climate change, for instance. Many are taking environmental issues more seriously. Both spur important considerations for family office investors.


ESG Trends Among Family Office Investors

Like real estate, private equity and other alternative investments, family offices have shown an interest in ESG investments, especially in recent years. Several indicators highlight this inevitable trend of family offices increasing allocations to ESG-focused funds and companies in the coming years. 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 sustainability and ethics.

Firms such as Fidelity and Vanguard, understanding the widespread demand for ESG investments, have launched ETFs comprising 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. 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.

 

Family Offices Investing in ESG by AUM

 Family Offices Investing in ESG by AUM

SFO & MFO Breakdown of Family Offices Investing in ESG

SFO & MFO Breakdown of Family Offices Investing in ESG: 

All data was derived from the FINTRX family office data and research platform


Regional Breakdown

What was once a niche industry focused mainly in the United States has now gone global. An increase in private wealth has continued to expand the creation of new family offices in areas that were essentially void of family offices in the past. Asia, for example, has seen a rising number of family offices over the past few years, with many predicted to be on the horizon as generational wealth continues to change hands. With an increase in family offices, comes an increase in global ESG interests.

Top 3 regions with family offices showing esg interest

Quick Hitters:
  • - More popular in Europe, on average, than anywhere else in the world
  • - More popular with single-family offices as opposed to multi-family offices
  • - More popular on the west coast than on the east coast

Wealth Origin Breakdown 

Family offices, specifically single-family offices, are much more likely to allocate capital to industries in which their wealth originated. This can be increasingly valuable for funds and private companies seeking a seed investor. If you can target capital that can wrap their arms around your proposition and truly understand what you're doing, your hit rate will rise. Understanding the industry or way in which the principal made his or her wealth is often an important insight into how the family office might operate and deploy future capital.

Industry of Wealth: Top 3 Industries


Conclusion

What began as a group of individuals looking to invest in socially and environmentally responsible companies has now become an effective form of capital allocation. Critics have said that ESG investing is merely a bull-market phenomenon, while others argue it represents a fundamental shift in investing; Either way, the ESG trend is here to stay. Running parallel to the ESG boom is an increased demand for responsible investment vehicles, particularly within the family office space. Family office numbers 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, are resulting in a lower average age of decision-makers within the space. This new generation has already strayed away from the old-school ways of their parents and predecessors, and this will likely continue in the future. Firms such as Fidelity and Vanguard, understanding the widespread demand for ESG investments, have launched ETFs composed of securities they deem responsible. 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.

 

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