Next-generation wealth holders highlight the S in ESG

Wealthy investors of all ages are sharply focused on cli­mate change and sus­tain­abil­i­ty. But for the younger gen­er­a­tion, social jus­tice is also a grow­ing pri­or­i­ty – and actions must speak loud­er than words. 

Envi­ron­men­tal, social and gov­er­nance (ESG) issues are now cen­tral pil­lars for wealth man­agers and their clients, but moti­va­tions dif­fer across the age spec­trum. 

If build­ing a sus­tain­able plan­et for the grand­chil­dren is an urgent pri­or­i­ty among old­er peo­ple, then for the under-40s, progress to net zero is a giv­en. 

Spurred on by the eco­nom­ic and health inequal­i­ties pin­point­ed by the coro­n­avirus pan­dem­ic, many are look­ing beyond cars and plas­tics to glob­al pover­ty, child labour and per­va­sive dis­crim­i­na­tion.

In their bid to reframe their fam­i­lies’ invest­ments along such lines, they’re prov­ing to be high­ly demand­ing clients.

“Younger peo­ple can be very impa­tient for change and while many port­fo­lios have already been sig­nif­i­cant­ly cleansed as a direct result of their influ­ence, the con­ver­sa­tions we con­tin­ue to have with them can become emo­tive,” says Leslie Gent, man­ag­ing direc­tor and head of respon­si­ble invest­ing at the pri­vate bank Coutts.

“While the debate around ESG inevitably starts off with them want­i­ng to make par­tic­u­lar exclu­sions from a port­fo­lio, it’s our job to explain to all mem­bers of the fam­i­ly that if you lim­it your investable uni­verse, there will be impacts on your returns.” 

A shift in emphasis

Aside from dif­fer­ences in approach between gen­er­a­tions, there is also a notable gen­der split, with women – par­tic­u­lar­ly younger ones – notice­ably more vocal about social inequal­i­ty than men.

Younger women are “far more pre­pared to open dis­cus­sions on these tricky issues than their male coun­ter­parts and anec­do­tal­ly at least, I would say they have a greater under­stand­ing of them,” says Alexan­dra Loy­don, direc­tor for part­ner engage­ment and con­sul­tan­cy at wealth man­age­ment house St James’s Place.

While under-40s in gen­er­al tend to be bet­ter edu­cat­ed about social and gov­er­nance ele­ments than their par­ents, younger men are “prob­a­bly more inter­est­ed in returns”, Loy­don adds. 

The social side of ESG has tend­ed to attract less pub­lic­i­ty and invest­ment than the envi­ron­men­tal seg­ment. How­ev­er, younger clients have a wide range of con­cerns, reach­ing far beyond the tra­di­tion­al ‘sin stocks’ linked to alco­hol, gam­bling or the arms trade.

“They want to know more about the impact their invest­ments will have on issues such as child labour, the mar­ket­ing of tobac­co to the third world, uneth­i­cal work prac­tices or the num­ber of women in lead­er­ship roles. What­ev­er the top­ic, their ques­tions can be direct,” says Loy­don.

Greater trans­paren­cy and dis­clo­sure about the poten­tial­ly pos­i­tive and neg­a­tive impacts of their family’s cap­i­tal is also tak­ing cen­tre stage. 

“Whether as an indi­vid­ual investor, entre­pre­neur or fam­i­ly mem­ber, this is about align­ing their role with a pur­pose so that they can max­imise the impact they can cre­ate,” says Andrew Lee, man­ag­ing direc­tor and glob­al head of sus­tain­able and impact invest­ing at UBS Glob­al Wealth Man­age­ment. 

The future of fos­sil fuels fre­quent­ly comes up in fam­i­ly meet­ings and for many next-gen­er­a­tion investors, remov­ing major car­bon emit­ters from a port­fo­lio is an obvi­ous first step towards a low-car­bon future.

For fund man­agers, how­ev­er, divest­ing prob­lem stock rather than engag­ing with the com­pa­nies involved – all of which have cru­cial exper­tise to share – is a case of throw­ing the baby out with the bath­wa­ter.

“Coal is a no-go for us because there’s no place for it in a net-zero world, but when it comes to oil and gas, we have to avoid starv­ing big play­ers of cash,” says Gent. “If that hap­pens, they will go into pri­vate hands and we will have no fur­ther influ­ence over them.”

After 20–30 years of dia­logue with the sec­tor, change is start­ing to occur, “but it can’t nec­es­sar­i­ly be achieved in any­thing like the next 12 months,” Gent adds. “That’s some­thing that younger clients don’t always want to hear.” 

Growing scrutiny

Younger, ‘dark green’ investors are com­mit­ted to respon­si­ble invest­ing and want as much as pos­si­ble of their port­fo­lio invest­ed accord­ing to their per­son­al val­ues. Indi­vid­ual invest­ments are com­ing under clos­er scruti­ny from such investors, who will one day assume con­trol of big fam­i­ly port­fo­lios. The val­ues of wealth man­age­ment hous­es are also in their sights. 

“Green­wash­ing is a big prob­lem in the indus­try and it requires us, as asset man­agers, to draw on the knowl­edge of many dif­fer­ent dis­ci­plines so clients can receive the guid­ance they need to help make an informed choice,” says Gent. “If you’re going to hold oth­er com­pa­nies to account, you have to start with your own busi­ness. For us, this is about being trans­par­ent and offer­ing detailed dis­clo­sures on our web­site for clients to exam­ine.”

Faced with a bar­rage of ‘Paris-aligned’ invest­ment oppor­tu­ni­ties and ‘respon­si­ble invest­ing’ hubs from invest­ment hous­es, would-be investors with­out a PhD in envi­ron­men­tal sci­ence could be for­giv­en for being out of their depth.

This is why wealth man­agers who can sift through the claims and coun­ter­claims of ESG invest­ing are becom­ing ever more vital. That’s the view of Tim Fas­sam, direc­tor of gov­ern­ment rela­tions and pol­i­cy at the Per­son­al Invest­ment Man­age­ment and Finan­cial Advice Asso­ci­a­tion.

“Their abil­i­ty to cut through com­plex jar­gon and give bespoke advice based on their client’s high­ly per­son­al eth­i­cal approach – some­thing which may have involved lengthy delib­er­a­tion by the entire fam­i­ly – makes man­agers a vital con­duit between dif­fer­ent gen­er­a­tions and a trust­ed advis­er for all age groups.” 

Many of today’s wealthy investors are acute­ly aware of their high­ly priv­i­leged posi­tion. They are keen to use their mon­ey not sim­ply to cre­ate a lega­cy but as an active force for good.

With a grow­ing num­ber of ESG oppor­tu­ni­ties now avail­able to them, the age-old tus­sle between doing good for soci­ety and mak­ing mon­ey for the fam­i­ly may final­ly be los­ing its grip, Fas­sam says. “Invest­ing for sus­tain­abil­i­ty and invest­ing for per­for­mance are no longer poles apart and that’s good news for all of us.”