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.
Faced with a tumultuous societal, environmental, and economic landscape, wealthy investors are vocally embracing the idea that their private capital both impacts, and is impacted by, the world. However, less visible are their personal motivations and portfolio actions around sustainable investing. New research, sponsored by Barclays Private Bank, reveals the detailed attitudes and actions of some of the leading private wealth holders and family offices investing for positive social and environment impact.
In 2020, sustainable investing no longer requires a revolutionary mind-set. With increased media visibility and industry discussions, it is a rapidly accepted trend in the investment world. Nor is there doubt about the growing size of the market. Despite the International Finance Corporation (IFC) estimating around US$505bn in investments as being measured for their impact, the figure in private markets alone could be as high as US$2.1trn1.
Investors across the globe, indicate they no longer seek to make a return at any cost to people and planet2. And while they still want to protect and grow their portfolios, they also want to avoid negative, and make positive, contributions to the world.
Sustainable investing offers this attractive proposition. But for many not yet active in the field, the challenge is how best to define and execute an investment strategy. Here 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, provides a unique insight into how leading investors are responding. The report, which surveyed over 300 respondents from 41 countries, with an average net worth of $876m, shows the diversity of approaches and clear momentum for portfolios.
Before disclosing the portfolios and strategies of these investors, it’s useful to understand what is driving the trend.
Broadly the report highlights that motivations of these families and family offices fall into three categories: the desire to do good, alignment with family interests, and the aim to secure better returns. From the survey, 38% of respondents felt a responsibility to make the world a better place as their overall priority, while 26% want to show that their family wealth can be invested for positive outcomes2. And 24% believed incorporating sustainability considerations would lead to better investment performance.
Or, as the Chief Financial Officer for a North American family foundation put it in the report: “The family has a commitment to not make money from something that is creating harm in the world… and we’re smart enough to do that and make a competitive return.”
Barclays Private Bank Behavioural Finance Specialist, Alexander Joshi says: “We have for a long time seen investors displaying a multitude of very different motivations for embarking upon sustainable investing journeys. Whatever their individual values and motivations, however, COVID-19 appears to be an accelerant to acting upon them.”
With a challenging macroeconomic environment ahead, and societal changes driven by the pandemic still emerging, investors are facing more complex decisions. Some are using this disruption to rethink their portfolio allocations.
Barclays Private Bank’s Head of Sustainable and Impact Investing, Damian Payiatakis, says: “Our clients are being challenged to safely pilot their family’s lives and their portfolios through the disruptions of 2020. It also means we are having more discussions about the future - how their family’s wealth can reflect more of their values and the role they want to play in society.
There is undoubtedly a generational response to this too, says Joshi:
“The COVID-19 pandemic has focused the minds of long-term investors that sustainability is now very hard to ignore. Older generation wealth holders are being motivated to think about the likely effects upon the wealth they have worked so hard to build, and want to pass on. As the next generation of investors come of age, it’s likely that their differing mind-set will mean they are naturally more likely to take social and environmental criteria into account in all their investment decisions.”
Data from the report reinforces this. Overall, 20% of respondents are involved with sustainable investing to engage with the next generation and to secure a legacy for them. Sixty-nine per cent made it either their first or second priority.
Overall, the report indicates global private wealth holders intend to almost double their investments within sustainable investing over the next five years. As a proportion the allocation is expected to move from an average of 20% of their portfolio to 35%, with a quarter aiming for over 50%.
Beyond this headline figure, interestingly investors are taking multiple approaches and routes on their sustainable journey.
First, it should be acknowledged that these families and family offices are at different stages of their experience and knowledge. Some are at the start, with 23% having made their first investments and are “considering further opportunities”. Fifty per cent are “active with multiple impact investments across asset classes or causes”. Impressively, 16% see this approach as the primary way they invest across their entire portfolio. In fact, 8% already have between 80% and 100% of their portfolios invested in this way.
Rather than COVID-19 disrupting this momentum, investors’ resolve seems to have been reinforced by it. Speaking in the report, a family member of an office in North America views the pandemic as exactly the catalyst needed: “In 2016, the goal was to invest 20% of our discretionary portfolio into sustainable investing. We found a couple of attractive funds, invested, and they did really well. We will try to opt in to 50% by 2022, [but] due to the pandemic, we’ve done a bunch of rebalancing. All of the rebalancing now goes into managers that pursue social or environmental objectives.”
Beneath these headline allocations, investors are building portfolios with a variety of asset classes, public and private, and with various levels of engagement. Often this is based on investors’ familiarity and underlying preferences around the asset classes rather than availability of sustainable investment options.
While these investors use a variety of instruments, they show a strong preference for private equity and real assets with 27% of investors using these respectively. However, no clear preference emerges around whether to invest directly or via funds, with 56% favouring a direct strategy into companies, projects or real assets, with 44% investing indirectly.
For first generation wealth creators and families still active in their businesses, seed or start-up stage businesses generate significant attraction. Though some multi-family offices prefer to go later-stage, as this family member in Asia-Pacific explains in the report:
“Mid-scale companies and larger companies are possibly most interesting [to us]. When it’s too early stage then the focus is more on the commercials, like getting the company off the ground and making sure the company survives. Once the company has raised the funding and they want to bring on board impact stakeholders or impact investors, that’s when they can seriously start focusing on impact.”
A range of investment techniques and practices have emerged for investors to integrate their sustainability preferences into their portfolios.
Ethical investing, or excluding companies or sectors based on personal values or belief, appears to be the starting point for many families. Negative screening based on ethical criteria on all or a majority of investments is pursued by half of those surveyed (52%). Nearly a third (29%) applied exclusion criteria on some of their investments.
However, the most prevalent strategy is a responsible investing approach to integrating environmental, social, and governance (ESG) considerations into investment decisions. Ninety-seven per cent use ESG considerations in at least some of their portfolios. For many investors, the primary aim of this approach is to protect and enhance financial value, by identifying non-financial risks.
As this chief financial officer in North America stated in the report: “I don’t tend to think of ESG as impact. To be blind or to ignore the various factors that are considered and measured within ESG, would be to not critically evaluate a business and an investment. To me ESG is just good due diligence.”
Finally, nearly all respondents, (95%) were investing intentionally to address a specific social and environmental challenge that seeks to deliver a specific outcome alongside a financial return. This impact investing approach though isn’t widely used across the portfolios, as two-thirds (65%) do so on some, 19% on a majority, and only 11% on all investments. Going one step further in their commitment to use their wealth for positive outcomes, 57% would for some investments accept risk and/or concessionary returns relative to conventional investments to generate positive impact or enable investment that would otherwise not be possible.
While these investors may be willing to go that extra step in some cases, their views and experience demonstrates competitive financial performance can be delivered through sustainable investing.
A large majority of respondents (87%) say their impact investments either met or exceeded expectations on non-financial objectives, reflecting a very high level of satisfaction among investors. As one family member explained in the report: “We are investors. Our first criteria 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.”
When questioned about their view on the relationship between financial returns and sustainable investing, the narrative is around one of choice. Forty-five per cent of the respondents surveyed confirm that “you can choose to target lower financial returns or to take on greater risk, but you do not have to give up returns for impact.” Similarly, 32% believe that there is no trade-off between financial returns and impact and 11% believe there is no relationship between these two aspects of an investment.
The differing investor approaches go some way to explaining the current mind-set that sustainable investing has – and should have – nothing to do with compromise. Risk-reward has now been redefined by the impact narrative, and the report demonstrates this firmly.
This sentiment is reflected by a family member of Asian-Pacific multiple family office, who comments in the report: “We look for an impact mind-set and if companies are putting in place the systems to deliver this. You can’t really micro-manage this too much, because you don’t want the commercial returns to suffer. We are not philanthropists. It’s investing for a return. And I think we all do not want to compromise on commercial returns. That’s number one.”
Hearing from this cohort of leading investors can be valuable, but how do you start the journey for yourself or your family? Certainly there’s a movement that has been prompted by multiple global disruptions, which is reshaping the nature of risk and how investors should view it.
As Payiatakis explains, “The report shows, families are considering the impact of their capital and then increasingly taking action, by allocating more towards solving our urgent global societal and environmental issues. We see clients and prospects wanting to make this shift are looking for guidance to navigate the rapidly evolving field and to access high-quality opportunities that can deliver financially and with positive outcomes.”
Before embarking on the journey, most investors begin by having conversations to clarify their ambition and values and undertake an assessment of their current portfolios. These serve as the direction for future portfolio construction and asset selection. Thereafter, as the report shows, investors can access a range of investment approaches and opportunities to transition their portfolio over time.
Barclays Private Bank’s Joshi cautions that some opportunities might not be what investors want them to be. “Marketing of impactful investments is very high currently, and can pull at the emotional biases of investors. So investors should look to get the benefit of dispassionate analysis to support their decisions.”
Overall, though from the experience of the respondents, and many of Barclays own clients, the most important step is the first one. It will not be one they have to take alone though given the growth of this movement.
As one European family member summarises in the report: “In a way, it’s a wonderful time [given the pandemic] because now we see that if everybody pushes in the same direction, we can achieve tremendous results. Why can’t we also achieve the same if we all put this much effort into fighting social injustice or climate change? There is so much power when countries, governments, companies, and people all have the same goal.”
We examine the sustainable investing journeys taken by Ultra-High-Net-Worth individuals, families, family offices, and foundations.
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