While previously intimidating to many, the acronym ESG – Environmental, Social, and Governance – stands for a lofty vision that appeals to asset owners, managers and investors alike. It cuts across environmental causes, such as climate change, to social agendas aimed at promoting workforce diversity and the eradication of racial discrimination, and finally arrives at board governance practices, as well as disclosure and reporting standards.
That sustainable investing is now mainstream is no longer a controversial statement; the 50th World Economic Forum, held in January 2020, cited climate-linked environmental issues as projected to have substantial global economic impact over the next 10 years.
How does private wealth fit into this discussion?
Impact investing serves to “bridge the gap between philanthropy and asset management,” MAS deputy director Jacqueline Loh points out in her keynote speech at the AVPN Virtual Conference 2020. The Monetary Authority of Singapore recently observed that foundations, trusts and family offices are well-placed to drive positive societal change through their investments and business operations. Our firm’s experience in helping Asian clients set up their family foundation or family philanthropic trusts has demonstrated that [ESG in] philanthropy is a growing consideration. This development was also cited in the 2019 Global Family Office Report prepared by UBS and Campden Research. More than 25% of family foundations surveyed are actively engaged in sustainable investing, with climate change, clean water and global health issues their predominant concerns.
Family offices (FO) tend to be smaller than global institutional funds but private capital has more than sufficient clout to make a difference. In addition, FOs are more agile and move at a quicker pace, as they are not saddled with multi-layered decision-making and protocols inevitable in institutional managers.
Our experience also reveals that many FOs do not have a set of strictly defined key performance indicators for ESG investments. Instead, it is often a set of unspoken and evolving common philanthropic values prevalent within the family that drives their impact investment.
Whilst there is no standard blueprint for impact investing, we have found the following guidelines, laid out in the 2014’s World Economic Forum (WEF) Report, “Impact Investing: A Primer for Family Offices”, to be particularly useful:
Determining and agreeing on what the family’s core values, long-term goals, and legacy are, so that investment strategies are clearly articulated, aligned and implemented. This may be more difficult to achieve if there are diverging preferences and goals.
b) Developing appropriate guidelines
There is no “one-size-fits-all” formula to the adoption of ESG strategies. Family offices need to consider which sustainable investing approach best aligns with their investment philosophy and ascertain how best to integrate ESG factors into their financial analysis matrix. One possible method is the conventional negative (or exclusionary) screening approach, which filters out companies operating in “undesirable” sectors and/or expressly includes ESG criteria to achieve maximum risk-adjusted returns. Family offices need to focus solely on material ESG factors that impact financial performance; it is neither possible nor necessary to cover all aspects of ESG.
c) Re-thinking and Upskilling
A mindset shift, ensuring that provision of relevant resources, and hiring or re-training where necessary introduces, integrates, and ingrains ESG practices into the FO’s processes. This could be tweaking a dedicated function, or conducting a re-scoping of existing investment workflows with the support of external advisors. The team then works to overlay the FO’s asset management and philanthropic activities with ESG considerations, possibly working alongside or under the purview of a sustainability committee. Financial and social performance must be monitored, valued and regularly communicated to stakeholders.
Regardless of individual circumstances, cultural transformation is the ultimate goal. Rather than acting as a means to an end, ESG should inform the FO’s approach holistically.
d) Impact assessment
The main challenge to impact investing has been in the determination of the metrics of “success”. Returns must clearly exceed previous financial performance but setting clear expectations at the outset and how they are measured will avoid subsequent ambiguities and potential disagreements. Working with knowledge partners and expert advisors are crucial to conducting accurate and meaningful impact assessments.
The Asian Venture Philanthropy Network (“AVPN”) published a useful guide in May 2016 (A Guide to Effective Impact Assessment). It explores various frameworks and templates for impact assessment, the motivations for impact assessment and how impact assessment frameworks are set up. Key takeaways laid out in the Guide include: