In 2022, half of all investors will move money into ESG funds, confirming that this space is now firmly on the radar of private clients. But what’s driving demand and what should clients and advisers keep front of mind when embarking on the journey?
Almost half (46%) of people surveyed in Hong Kong, mainland China, Singapore and the UK believe their portfolios will be entirely made up of sustainable investments in the next three to five years.
So says research commissioned by HSBC Asset Management last year, which also found that 82% of respondents rate sustainable, environmental and ethical issues as quite or very important.
“Our economies are no longer purely dependent on governments,” says Lucia Perchard, Head of Family Office Product at Apex Group.
“Instead, they increasingly rely on well-functioning businesses that create employment opportunities and provide goods and services locally as well as for export.
“People care about where these have come from, how they are generated and the effects they have on the world around them. This has driven changes in buying habits, as consumers are more alive than ever to their purchasing power.
“They are choosing who they want to work with or buy from. This then effects the returns on investments made, so knowing the ESG rating of a business can assist in understanding some of the risks associated with it.”
“ESG is certainly experiencing exponential growth,” says Andrew Munro, Guernsey-based Counsel for Carey Olsen. “It’s becoming much more mainstream, particularly with the second and third generations of wealth holders, who are very conscious about ethics.
“People are estimating that around $30tn is currently invested in the ESG space, and that’s expected to increase to something like $50tn in the next 20 years. This movement is here for the long term.”
Treading the right path
Despite its popularity, ESG is a far from straightforward area to navigate. Elizabeth Shaw, Senior Associate at Bedell Cristin, explains how the role of trustees in this space has changed in recent years.
“The duty of the trustee is to act in the best interests of its beneficiaries,” she says. “Historically, this meant their financial interests.
"This left a question mark over investing in something that potentially won’t provide as much financial return as another investment, but might instead offer environmental or social returns – and whether doing so aligns with the obligations of trustee.”
This mindset has changed, she says. “There’s now an argument that to not take into account ESG factors would be a breach of your duty, because if you’ve not done so you’re exposing yourself to a risk.
“But today we also have that broader spectrum of opportunities, such as impact investing, where the aim is to make a tangible difference, and here we might not get those financial returns we now associate with ESG, which today is widely considered to be performing well.”
“Even the term ESG itself isn’t very developed and pinned down,” explains Munro. “It seems to have taken hold as the main moniker for an area that covers a number of factors that ultimately feed into sustainable investing and protecting the world. “But it also encompasses socially responsible investing and impact investing – which can actually feel much more like philanthropy.”
Perchard believes an awareness of all of these forms of investing is vital in the private client space. “With great wealth comes great responsibility, and the actions of the few have significant effects on the many,” she says.
“Half of the world’s net wealth belongs to the top 1%, with the top 10% of adults holding 85%, while the bottom 90% hold the remaining 15% of the world’s total wealth. Those 90% are looking to the top 10% to make the right choices.”
Melanie Griffiths, Head of Client Solutions, Private Wealth, at Equiom, says: “Ultimately, a discussion around ESG is a discussion around the family’s values. It can engage various family members more than talking about benchmarks, sharp ratios and historical volatility.
“At a time when so much wealth is transitioning, discussions around ESG can provide a common anchor to relate to investments in a more meaningful way across generations,” she continues.
“ESG has brought to the table individuals who previously had no interest investing, despite the fact that these decisions have the potential to significantly impact their lives. This is something that should be very much celebrated.”
Pivotal moment
Griffiths believes, however, that we’re at a crucial moment in this space. “When it comes to performance, up until now ESG stocks have been in line with the wider market or have even outperformed them,” she says.
“But with oil prices rising steeply and the current geopolitical situation resulting in increased defence spending and energy prices soaring, it may be that ESG stocks underperform the wider market.
“It’s easy to support ESG when ESG makes money. This could be the first true test of investors’ commitment.”
If we are at a point where clients potentially have to choose between purpose and profit, what do clients and advisers need to be aware of?
“As at any time that people are looking to make financial investments and wealth planning decisions for their future, clients are rightly expecting their banks and financial institutions to be in a position to provide expertise,” says Emma Bunnell, Head of Wealth and Personal Banking, HSBC Channel Islands and Isle of Man.
“It’s important, therefore, that clients looking to make green investments are dealing with financial organisations that are experts in this landscape and who carry out sufficient due diligence in order to assess ESG credentials,” she continues.
“Relationship managers must be able to demystify ESG investments, providing clear and simple explanations about how and why certain investments can make a material difference to the planet.
“Wealth planners need to maintain an in-depth knowledge of the landscape and talking about sustainability should be the norm.
"Planners should make it a priority to understand their client’s point of view on ESG matters and look for investment opportunities to help them achieve their own individual sustainability goals.”
Bunnell adds: “But as well as expertise, ESG adoption demands digital ease of access to solutions.
"HSBC’s online International Investment Centre, for example, provides funds that clients can explore at their leisure, such as low carbon, sustainable energy and climate change funds, which have been added to the platform in response to customer demand.”
Apex Group, meanwhile, has developed an ESG ratings and advisory service to help investors unlock value and drive transformational change by offering a global, independent, end-to-end service for the private markets.
“By deploying intelligent ESG data and insights,” says Perchard, “we can help our private investors drive capital towards ESG performance while influencing significant active change.”
Emotive impulse
Griffiths highlights the need to counter ESG’s emotive appeal. “Advisers must guide clients through tangible considerations that need to be factored in – liquidity, volatility, price – and then let them weigh it all up and make their own decisions according to what they value most.
“There is a lot of regulation coming out in this space, which will mostly stamp out unsubstantiated ESG claims,” she continues. “I expect ESG will get easier and cheaper to navigate, so it’s worth giving the industry a little time before making any long-term decisions.
“In the meantime, it’s important to distinguish between a company’s impact and an investor’s impact, as these are not the same thing. An investor has most impact where capital is scarce (so typically illiquid investments).
"Where capital is not scarce, empirical evidence suggests that the most effective thing investors can do is use the voting rights that come with shareholding to support ESG-friendly resolutions. This is something that can be implemented immediately.”
“Today more than ever, wealth planners need to make sure they understand and are aligned to the values, as well as the financial goals, of their private clients,” says Perchard.
“They need to be clear about the metrics, how they are measured and where investments are to be deployed. Most have a clear vision of the role they wish to play and the manner in which their wealth is to be deployed and returns generated. But, the metrics of ESG can be tricky, so engaging with professionals in this area will be vital.”
There’s a wealth of ways in which investors can operate when it comes to ESG, depending on their individual goals, wants and needs. It’s a complex area, but there’s no shortage of specialists who can help private clients find their feet.
“Wealth planners are building the foundations for the future success of their private clients and their families,” says Perchard. “So it is essential that future is a sustainable one.”