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.
How COVID-19 and climate change are propelling sustainable investing
With the world’s attention on the COVID-19 pandemic and its economic implications, climate change carries on regardless and will do so over a longer period. For investors, ensuring climate considerations are part of their investment strategy can help mitigate risks and provide attractive opportunities.
As an investor, your focus over recent months has likely been handling the peaks and troughs of the current crisis. But you will no doubt also be aware of the risks and threats posed to your wealth by the devastating effects of climate change on society, the environment, and economy.
So, how should you respond to these challenges? How should you position your – or your client’s – portfolio to weather the economic storms being unleashed by climate change? And where are the sector opportunities to invest to combat what the World Health Organisation has called "the most threatening risk to global prosperity over the next decade”?1
With the full impact of the COVID-19 pandemic yet to fully play out, the virus has for many, pushed climate change further from our consciousness. From governments to asset managers, the focus has been on the priorities of the present – preservation, protection, and survival. However, even amidst the economic fallout, environmental considerations are being incorporated into future planning. Bailouts for carbon-intensive industries have often come with environmental caveats. Many economic stimulus packages, such as the EU’s recovery fund, are closely tied to climate objectives.
The brief reduction in carbon emissions while the world was in lockdown will not slow climate change2. Whether we see long-term environmental benefits, thanks to step-changes in government policy, or human behaviour – such as a reduction in air travel – remains to be seen. But a clear message of hope and action is demonstrated by the overarching sentiment among respondents to the 2020 report Investing for Global Impact: A power for good published by Campden Wealth in partnership with Barclays Private Bank and Global Impact Solutions Today.
The report gathers the views of ultra-high-net-worth individuals, families, family offices and foundations on how they are using their capital for positive effect. With an average net worth of $876 million and cumulative net worth estimated at $264 billion, these 300 respondents from 41 countries have noteworthy views.
Today, discussion and visibility of climate change has been usurped by the pandemic as a leading media and global priority. Though investors might have made different portfolio decisions in the absence of COVID-19, it is clear that there is a renewed emphasis on understanding future risk – and this includes a more enlightened approach to investing in a way that mitigates the climate emergency.
“We have to be more aware of all sorts of risks, not just the traditional risks” said one European family office in the report3.
“In January 2020 nobody was talking about the threat of a pandemic. Now you can see that companies were not prepared. They were not prepared with distance working, not being able to go to the office. The infrastructure was not there. So, I think it’s a huge, huge opportunity. It also reminds us that we are vulnerable. We have to be more holistic and think outside traditional boxes.”
If we can take anything positive from the crisis, COVID-19 may fundamentally change how we think, behave, consume – and invest.
Global investor appetite for sustainable investing was already rapidly growing, and with climate change receiving increasing attention, it’s likely to accelerate. From the report, 87% of respondents believe that climate change has either a partial or a direct impact on their portfolios. As noted by the investment director of a European multi-family office, “In an unfortunate way, the reason the impact investing market is growing is because of climate change.”
COVID-19 has spurred an awakening among the ultra-high-net-worth community to reassess where and how their capital is being deployed. The majority (69%) of respondents agree or strongly agree that COVID-19 has affected their views of investing and the economy. Going further, 64 % indicate a wholesale reassessment of shareholder capitalism is the likely result of this current crisis.
As a family member from a multi-family office in North America says in the report: “COVID-19 will cause more sensitivity to ESG standards, which means more impact investing. The challenges are still there, but COVID-19 is an accelerant. It is a wind behind the sails.”
Climate change was already a focus for sustainable investing before COVID-19. And this will likely continue on an upward curve, as Maya Tabaqchali, Sustainable Portfolio Manager, Barclays Private Bank explains:
Between the coronavirus pandemic and climate change, it is difficult to imagine investors returning to their old ways and ESG-prescient investing being just a passing fad.
Your role as a holder or controller of wealth demands great responsibility to preserve, protect and grow that wealth. In addition to the pressure that entails, you may well feel an added sense of duty. According to the report, 82% of respondents feel they have a responsibility to support global social and environmental initiatives. As Tabaqchali says: “It’s hard to ignore the siren call to prevent the deepening degradation of our planetary home.” In 2020, that siren call is blaring.
As Dr. Malini Saba, philanthropist and founder of the Anannke Foundation, says in the report: “COVID-19 has been a blessing and also an evil, because we’ve never faced anything like this before. All of us have to rethink how we want to treat the planet and treat each other as human beings.”
As such, the crisis has led younger generational wealth holders like Victoria Engelhorn – a fifth generation family member of what is the world’s largest chemical company today, BASF – to reassess their role in protecting the planet for future generations4. Speaking in the report, she says: “One thing that COVID-19 has shown us is that there are possibilities out there. We just have to ask ourselves, how much is sustainability worth?”
Impact investing is the future, there’s no getting around it.
If your priority is to protect, preserve and grow your portfolio to be resilient to the threat of climate change, the question is therefore how to identify and assess the climate-related risks in your portfolio – and in the companies in which you are considering investing.
COVID-19 has a useful parallel and is proving a strenuous test of companies’ resilience. Companies demonstrating good environmental, social and governance (ESG) practice and behaviours while managing the crisis have performed well and are displaying strong indicators of market resilience. These will no doubt become increasingly attractive to investors.
According to the family member of an Asia-Pacific family office, looking at this non-financial, ESG data to assess risks has borne fruit: “I think ESG is a big component in the risk framework. And, if companies and funds are looking at that closely, the sustainability of their business models is stronger – especially in times of a crisis. So, I think that is a sensible strategy, and one that has paid off.”
Other respondents also show the strength of opinion over what direction should be taken. Sixty-six percent of all respondents agree or strongly agree that it’s time to widen their risk assessment to include ESG factors, whereas only 32% agree that the ‘normal’ pattern of investing will return post-COVID-19 crisis.
This can be extended to assessing the risk from climate change as Damian Payiatakis, Head of Sustainable and Impact Investing at Barclays Private Bank explains: “No company is immune from risks or the impact of climate change. All companies will have some contribution and exposure via their operations, energy needs and upstream and downstream supply chain.”
He continues: “When thinking of companies impacted by climate change, our first thoughts tend to be of carbon-intensive sectors – fossil fuels, utilities, transportation or industrials – predominantly affected by transition risk [market and technology, policy and legal and reputational risk]. That said, physical risks can still impact them depending on the region and the nature of operations.”
Historically, the primary approach for the climate-concerned investor was to divest of oil and gas companies. Unsurprisingly, over a quarter (27%) of respondents say they avoid companies they believe are major contributors to climate change. This compared with 13% who suggested they should still be considered given potential financial returns.
However, the greatest number of respondents, about one-third (34%), feel traditional fossil fuel producers should still be considered for investment because many may hold the key to a future on renewables. One private investor based in Europe explained that “when you think about the fact that the carbon industries have got huge amounts of money and R&D capability, they are possibly the ones who are primarily best positioned to assist in that area. They’ve got the investment. I couldn’t name one renewable energy company that is anywhere near the size of the major fossil fuel companies.”
Carbon footprinting is a good starting point for understanding a company’s or portfolio’s exposure to climate risks. For the first time, respondents this year were asked if they knew the carbon footprint of their portfolios. While expectedly 81% didn’t know or weren’t sure, interestingly, about one-in-five (19%) say they did.
When drilling down further, it became evident that those wealth holders or controllers who know their carbon footprint often use this knowledge to actively manage their footprint downwards (with a target in mind) (9%) or to consider it more broadly when making investment decisions (13%).
Most importantly, two-in five respondents (39%) who do not currently know their carbon footprint, expressed an interest in learning it to help guide their future investment decisions.
There are many exciting, fast-growth sectors that provide solutions to climate challenges and transition to a low-carbon economy. The current crisis may well also throw up investment opportunities out of the ‘creative destruction’ of the market and its ensuing recovery.
An obvious example, perhaps, is renewable energy, be it solar, wind, hydro, biofuel or geothermal. Given energy production’s central role in greenhouse gas emissions, switching to clean energy technologies is critical. While one of the more established markets, considerably more investment is needed. Finding ways to use less energy, or existing energy more efficiently, is key to achieving climate targets. One example is ‘green buildings’ which would cut the energy usage in the construction, heating and cooling of buildings which accounts for over a third of global final energy usage.
Electric mobility and autonomous driving technologies are high-profile growth areas which would reduce the energy consumption of transportation. A less headline-friendly sector is water and waste management, which was a target sector of 43% of the report’s respondents.
Water forms a critical input across numerous sectors such as industrials, agriculture, food and beverages, and clothing manufacturing. Physical risks to water availability are frequently driven by climate change and investment is needed to ensure water security. Waste not only pollutes the environment, but produces various greenhouse gases as it breaks down or is incinerated, or in the energy to collect, transport and process wastes.
Agriculture is one of the industries most affected by climate change, and so is most open to investment that helps to adapt to and mitigate that change, from alternative foods to farm machinery and precision planting. In fact, according to the survey’s respondents, 71% expected to increase their investments in food and agriculture in the next year, making it the number one sector.
Viewed as a whole, the opportunities span a whole range of sectors. Stephen Brenninkmeijer, part of the family that founded the retailer C&A and now Chair of the European Climate Foundation, notes in the report: “It is a quite amazing and inspirational field with very, very high impact. Working with the foundation means I get ideas to move impact investment more into the whole climate space. There are phenomenal opportunities out there”.
This sense of potential is reflected by Mike Topley, who as Head of Sustainable Portfolio Management at Barclays Private Bank, leads the increasingly popular sustainable discretionary portfolio. “Many of the clients we meet are acutely aware of the scale and severity of the sustainability challenges we face as a planet. So dominant is the zeitgeist that terms such as ‘ecological grief’ are being used to describe the guilt many of us feel about our meat consumption, or how much plastic we use, or how often we buy new clothes.
However, he adds: “Thanks to the technological revolution currently taking place, we are presented with the best opportunity we have ever had to resolve these challenges. Advances in connectivity, machine learning and cloud infrastructure will provide the answers. All we need is the will to make it happen. The allocation of capital is critical for making these solutions a reality and creating a sustainable world. Increasingly, our clients are recognizing this.
Similarly, there is, in some quarters at least, the political will that will create opportunities for thoughtful investors. For example, the European Green Deal, the European Commission’s plan to transform the EU from a high- to a low-carbon economy, to make its economy sustainable by ‘turning climate and environmental challenges into opportunities5.
Before COVID-19 struck, we knew much of the next decade would need to focus on how to de-carbonise the energy system and reverse the trend of rising CO2 emissions. Given market volatility and the forthcoming economic hardship facing many, investors may understandably question the importance and influence of climate change on their portfolios.
For investors, shifting focus to the longer time horizon of climate change may help them to identify risks and endure short-term volatility. It may also help them to find valuable opportunities to support rebuilding the economy in a lower carbon and more sustainable way.
The greater challenge, and opportunity, for investors is to connect their short-term response with long-term portfolio positioning to support a low-carbon economy, which can make us all wealthier and healthier for it.
We examine the sustainable investing journeys taken by Ultra-High-Net-Worth individuals, families, family offices, and foundations.
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