Investing for Global Impact: A power for good
We examine the sustainable investing journeys taken by Ultra-High-Net-Worth individuals, families, family offices, and foundations.
Gone are the days of a simple approach to wealth management for family offices. Today’s clients have increasingly complex motivations for incorporating sustainability across their wealth and investments; and the industry is rapidly adopting new sustainable investing practices. For Chief Investment Officers (CIOs), the right knowledge and resources will be needed to serve the changing demands of their families.
The family office has a simple aim: protect, preserve and grow the wealth of your clients. Yet growing demands and pressures are altering how CIOs are expected to play this role.
External influences have come together to make traditional approaches to family office investment less viable. The hunt for stable growth and income-yielding assets is being hampered by a long-term low-interest rate environment. Market volatility is being driven by the pandemic, and its long-term effects remain unclear. Climate change, and its stark implications, loom as the next systemic challenge.
At the same time, the changing nature and expectations of families are driving new ways of investing for their wealth. Younger generations are voicing their views and some are reshaping their entire family’s perspective of how to preserve and grow what they have built up. Ageing principals are reflecting on the wealth and legacy they will leave, as well as how to align and prepare younger generations to take on responsibilities with shared family values.
CIOs have to respond intelligently to these disruptions. Indeed, the fiduciary duty to show proactive thinking in these uncertain times could not be more relevant. Sustainable investing has gained significant traction over recent years, and is becoming central to the investment industry.
Yet, beyond increased industry discussion and exposure across the media, how are families and the offices guiding them, actually investing differently?
Barclays Private Bank, in partnership with Campden Wealth and Global Impact Solutions Today, has conducted research to provide a unique insight into the attitudes and actions of leading families and family offices.
Having surveyed over 300 respondents from 41 countries, with an average net worth of $876m, the Investing for Global Impact report serves as a benchmark for those interested in generating positive impact with capital. It covers a range of investment topics – motivations, portfolio allocations, investment strategies, asset class selection, themes – providing real evidence about how family wealth is shifting to sustainable investing.
Here we reflect on some insights from the report, as well as experience of the Barclays Private Bank Head of Sustainable and Impact Investing and Global Head of Family Offices in helping family offices navigate this emerging approach to investing.
Foremost, the report reveals the continued growth in investing for positive social and environment impact – with respondents indicating that their average portfolio allocation is expected to almost double, increasing from 20 per cent in 2019 to 35 per cent by 20251. In fact, 27% of respondents expect a majority of their capital to be sustainably invested in the next five years.
The top three motivations for this growth demonstrate both personal and financial drivers. Thirty-eight percent of respondents feel a responsibility to make the world a better place; 26% want to show how family wealth can be invested for positive outcomes; and 24% believe that incorporating sustainability considerations will lead to better investment performance.
It reveals, too, just how seriously respondents view the threat of climate change to their future survival and prosperity. Eighty-three percent expressed concern for the ongoing effects already occurring, and nearly nine in 10 respondents noted that climate change is either partially (50%) or highly (37%) relevant to their portfolios.
But what does this mean for family office CIOs, and how do they manage the shift?
Damian Payiatakis, Head of Sustainable and Impact Investing at Barclays Private Bank, says these are familiar conversations with family office teams.
“CIOs are generally aware of the topic, but they may be concerned about the implications of sustainability on returns,” Payiatakis says.
They are asking; ‘How do I continue to deliver my investment role and performance now that the family, or members of it, are expecting me to incorporate more complex values, aims and purposes?’
“Even without family demands,” he adds, “delivering long-term returns now calls for a greater ability to incorporate sustainability into the investment process – whether that means investing responsibly, identifying climate risks and opportunities or selecting high-impact, high-growth companies.
As one investment director of a European multi-family offices interviewed for the report explained, “We’re seeing a real uptake in the awareness of sustainability and impact. It’s much more prevalent in terms of the public discourse, and certainly amongst larger investors. Also, the European legal frameworks are changing the rules of the game. Impact investing is becoming much more a part of mainstream expectation.”
Payiatakis acknowledges that incorporating this approach isn’t always easy for CIOs. It is partly due to the complexity of the field, but also their training, backgrounds and past experience. Like any new trend, he notes, many are looking for help to get up to speed quickly.
One notable example was with the CIO for a Greek family, where the younger members, made clear their desire to move into ‘greener’ investments. Even within their traditional shipping business, the family were seeking sound advice on growth with a lower carbon footprint.
“The CIO was candid in saying to us that he wasn’t the right person to have a deep conversation on these topics,” says Payiatakis. “He wanted support to understand how climate concerns could convert to a better strategy for the family’s future investment. And as a result we’ve provided the insight to help facilitate that conversation between CIO and family, while being asked to join where needed to demonstrate that deeper knowledge.”
Sustainability is also central to the role of Effie Datson, Global Head of Family Office at Barclays Private Bank. She sees meeting this demand as a key pillar in both her interaction with clients, and the way in which she engages with other divisions across Barclays.
Sustainability, says Datson, can be viewed in four ways when CIOs engage with client families: “The first, for families and family enterprises, is to help them identify and offset things like their carbon footprint – meanwhile ensuring that good governance is in place and that everyone is aware of the societal impact their family office has as an explicit goal.
“The second is to apply good ESG principles to their portfolios and help them find an attractive risk-return, as well as new impact investments that fit with their evolving investment guidelines.”
With many families still tied to business models that are the original source of their wealth, Datson sees the third CIO role as easing their transition to something more sustainable and impact-friendly.
“Finally,” she adds, “understanding how they use their philanthropic dollars. Is this also in line with their value system, does it have good governance around it, and does it achieve their ultimate aims?” (You can read more about the holistic approach family offices are adopting to ensure a complementary strategy between philanthropy and impact investing.)
Delivering what families need, however, is not without its challenges. The terminology around sustainable investing in particular, is a minefield that can be difficult to negotiate – and the report illustrates this even with active, sustainable investors. While 40% of respondents believe significant progress has been made in achieving a common understanding of definitions and segmentation of the market, 51% also see it as a remaining significant challenge for the industry.
“There are a lot of words bandied about, whether ‘ESG’, ‘sustainable’, or ‘impact’,” says Datson. “These actually need to be understood in terms of how they relate to each other, and then in how we apply them to all of the different areas in which the family has an interest.
“CIOs have to move from a family’s high-level declaration that we are committed to doing something in impact, to a specific investment proposition – something you can buy or act upon today. It’s a complex journey that doesn’t happen instantly.”
Payiatakis agrees, and notes, “You are not going to go from sitting on the couch to becoming a marathon runner in one day. And nor do you need to make a portfolio sustainable overnight. You don’t have to buy the first sustainable opportunity that gets proposed. Investment strategies are generally phased. It’s crucial, though, for the family to articulate the direction for that transition.”
One of the hardest tasks facing CIOs today is how to broker a common family strategy in the face of inter-generational wealth transfer. Younger generations tend to be more in tune with sustainability challenges such as the climate crisis. And they have longer time horizons as the investments of today will shape the world they themselves grow old in.
“These generations are educated differently, have a different life experience and potentially a different value system to draw upon,” says Datson. “It’s very difficult for a CIO to continue doing a good job serving the controlling generation, while simultaneously welcoming the new generation into the fold in a way that builds up their expertise and allows them the right amount of voice at the right time.
“They know that this shift is happening – and so what we’ve been saying to CIOs is that governance is vital to helping them get above the fray and manage potential disagreements among the family. Family charters are popular ways to establish and articulate a family’s values and principles. That way, if somebody comes with an investment idea, these can be checked against the charter to see if they align with the agreed common aims. From young to old, everyone benefits from being on the same page.”
So, what does this look like in the current market? According to Datson, the uncertainties and economic turmoil of the markets have prompted families to hold larger than usual amounts of cash. The search for quality ‘distressed’ assets are the subject of more enquiries. The challenge for CIOs, however, is how to pick the winners.
Datson says: “The CIO needs to identify which distressed assets are so because of temporary conditions in the market, and which are structurally distressed to the point of no recovery. Fossil fuel companies might look cheap today, but some of these firms could arguably be heading to zero value.
“That process of evaluation will have to include sustainability factors – how well run they are from an environmental, social, governance perspective or what carbon risk they face. As well, CIOs need to look to where stimulus will more actively support certain industries. For example, we already know that any recovery in Europe and the UK will have a strong sustainable lens to it.”
Sustainability can also feature in fixed-income, illiquid assets: “On the fixed-income side,” she adds, “we’re seeing rapidly-growing infrastructure debts coming to the market, where investors are financing solar and wind farms or waste energy utility plants, through to long-term private debt at potentially attractive yields.”
“Something like this may protect you from long-term inflation while also achieving the energy transformation we all increasingly recognise as necessary.”
Just as no family business is the same, there is no archetypal family office.
“Every family office has its own characteristics,” says Datson. “Given that every family office is at a different stage in their sustainable investment journey, the Private Bank’s aim is to form a unique, high-touch relationship and to meet each family office where they are. One I can think of, which made its wealth through the extraction industries, has now transferred the majority of its holdings over to the younger generation. They have now reoriented 100% of their portfolio into sustainable and impact investing. When we engage with them, we only bring ideas that fit with their newly-established way of thinking.”
Some though have been later adopters around sustainability. Recognising the challenge and opportunity they are looking to progress. Datson adds that it’s an issue that is close to home for Barclays Private Bank. “As a business, we are making this transition ourselves,” she says.
It’s a sentiment echoed by Payiatakis, who describes it as “horses for courses,” and is something that CIOs can embrace without being overly concerned:
“As the research – and our conversations – demonstrate, families are each finding their own way to incorporate sustainability into their investment portfolios. For some it means focusing on cause, for example, climate change or gender equity. For others the focus is on portfolio management, for example better risk mitigation, diversification, or structural growth sectors.”
He goes on, “CIOs are investors foremost. At first it may be difficult to understand how sustainability adds value to their role. But, with a little help, they are quickly finding the right tools and investment opportunities to enhance their existing investment approach, and its results.”
As one respondent, a family member of a European family office, put it: “We are investors. Our first criterion is financial returns. But, it doesn’t mean we compromise on responsibility. And we try to find the companies and the funds that believe in the same philosophy.”
We examine the sustainable investing journeys taken by Ultra-High-Net-Worth individuals, families, family offices, and foundations.
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