Returns and resilience: families’ approach to ESG and values-based strategy

In this fourth blog in our series reflecting on themes from our Generation Game report and roundtable event, David Webster and Pippa Garland delve further into some of the issues touched on in our first blog on the changing notions of responsibility and wealth. Here, they explore ideas around sustainability, the ‘greening’ of portfolios, and what ESG really means to families.

Just as world leaders were preparing for two weeks of tough negotiations at the COP26 UN climate summit in Glasgow late last year, some positive news emerged. Data from Morningstar was released showing that sustainable fund assets were on the brink of reaching the $4 trillion mark in Q3 of 2021, having almost doubled in the previous six months. The timing was apposite, demonstrating just how far the concept of ESG (environmental, social and governance) investing has come in recent years.

There’s certainly a huge amount of noise about ESG. Companies are vying to demonstrate their green and ethical credentials, while regulators are trying to rationalise the market and safeguard investors (including via the EU Sustainable Finance Disclosure Regulation).

However, while there is a growing body of data that points to the outperformance of ESG funds compared to ‘traditional’ investments, there has also been something of a backlash against ESG and purpose-led strategies in some quarters. Fund manager Terry Smith’s much publicised criticism of Unilever’s sustainability drive (which he claims came “at the expense of focusing on the fundamentals of the business”) is a case in point. For others, the lack of agreed terminology and metrics is a more pertinent challenge to the ESG movement (the EU’s ‘green taxonomy’ for example has faced some stinging criticism). Key terms are often ill-understood, and products may be marketed as ESG-positive, even if all they have done is divest their holdings in oil companies. There is, it is argued, still much scope for ‘greenwashing’ – which may only increase as demand for ESG products grows and potentially outstrips supply.

Values and responsibility

For (U)HNW families and individuals, though, ESG strategy in the financial markets is just one aspect of an even more complex and varied picture.

A core theme which emerged from our Generation Game report was the sense of responsibility which comes with wealth, and the imperative to utilise that wealth to leave behind a positive lasting legacy for beneficiaries – including broader society.

This imperative has been central to philanthropic activities and public works for families over many centuries.

However the rise of ESG investing has brought a growing sense that financial returns and ethical or moral responsibility, and societal value creation, are not mutually exclusive.

There’s no hard and fast playbook here: all families are different and will have their own unique goals and associated strategies for achieving them. But generally speaking these strategies are likely to be formed by a blend of three main areas.

The continued role of philanthropy

Purely philanthropic activity is still hugely important, particularly where the issues that matter to a family or individual are best addressed by the direct allocation of capital to a cause or area in need of specific and immediate funding, for example, by donating to vaccine research. This clearly will continue to play a central role for many.

However while traditional philanthropy essentially consisted of making profits (sometimes without much consideration for wider societal expectations) and then giving a portion away to good causes, wealth owners are increasingly seeing opportunity to create economic returns and generate positive impact to people and planet at the same time.

Indeed for families who take a long-term view across the generations, resilience and stable returns are key. There is a strong argument to be made in favour of allocating capital to those businesses and ventures which will deliver lasting ‘planetary’ resilience – ranging from supply chain sustainability to the preservation of human and natural capital.

ESG portfolios and shareholder ‘activism’

 This may partly be about divesting portfolios of exposure to perceived ‘harmful’ investments, but it may also include deploying shareholder influence to drive change ‘from within.’ As argued compellingly by experts at our roundtable, private investors, and especially families, are ideally placed to act as agents of change on ESG issues by using their voice, and their shareholder votes, to influence corporate decision-making.  This is already happening with many corporates, for example Nestle, signalling that they are listening to shareholders on ESG issues.   

While often considered to be something primarily driven by the younger generation who have grown up in an age of heightened consciousness regarding environmental issues (the Greta Thunberg effect), to say nothing of Covid-19 and its legacy, this is an issue which in fact crosses the generations. Indeed, recent research has identified that ESG investing can act as a highly effective bridge between the generations, finding common ground regarding purpose and profit, and building familial cohesion.

Direct impact and familial change

Other families and individuals may, though, want to be even more ‘hands-on’, particularly where there is a desire to see immediate and urgent change.

For some this may mean implementing ESG criteria to the management of their own affairs – such as reducing carbon footprint through minimising air travel and incorporating good social and governance principles when employing and safeguarding staff.

For others, it may be committing funds to ‘green’ existing assets such as property, with a view to enhancing, or simply preserving, their value over the longer term.  

We have also seen an increase in families being willing to invest significant amounts into new business ventures based around, for example, new technology designed to have a material impact on sustainability issues. These types of start-up business can be very capital intensive in their early stages, and like any start-up are inherently risky investments (albeit with the potential to deliver significant returns). In these examples, the investors are aware of the speculative nature of their investment and the risk of 'losing’ money is not a primary concern. However, whilst there is a strong pull towards the wider goals of the relevant business, equally these capital injections are not entirely philanthropic and appropriate legal frameworks are put in place to protect the individual’s or family’s interests in the project.  If the business does succeed, the investors will expect to be rewarded accordingly.

A statement of intent - values and legacy

Taken together, the way these various areas and issues are handled is a reflection of the way families see themselves and acts as a statement of intent about the legacy they want to leave to the world.

But first and foremost, whatever strategy families decide to pursue, the first step is a clear identification of the things that really matter: the family’s values.

This can be a complex conversation to have, and may involve challenging the existing way of doing things - which always brings with it risk of misunderstanding and even conflict. But those difficult conversations, as we discussed in our report, are important to have and there really is no time like the present.