Covid-19 has brought many wealth holders closer to the next generation – and that generation’s demand for ethical and socially responsible investing is further heightening the already rising demand for ESG products. And the industry is responding at pace
There haven’t been many silver linings to emerge from the Covid-19 pandemic. But despite the stresses and strains of social distancing, one positive to emerge from the past year has been the strengthening of bonds across family generations, as sons, daughters, mum, dads and grandparents have come together to face up to questions of longevity and loss.
While that’s been the case for families of all types, in the case of high-net-worth families, it has also had an impact on their wealth management strategies.
“Very rarely are we given an opportunity to stop and think. Family founders have felt vulnerable in this time and the conversations around power of attorney, estate planning and wills that they had been postponing are now top of the list,” says Savvas Michael Mallas, Director, Family Office, at Stonehage Fleming in Jersey.
“Engagement with the next generation has accelerated during the pandemic and it has led to improved and healthier family relationships.”
This trend is timely – and crucial, given that, according to the UBS Global Family Office Report 2020, a third of the next generation admit they are either only slightly or not at all engaged with family wealth.
“Any engagement with the next generation is driven by succession planning and the transfer of intergenerational wealth,” Mallas says. “It is about incorporating the next generation into family values and businesses and trying to identify roles for family members as they go through their personal development.
“We are identifying the natural directions that family members are heading towards, particularly the next generation, and understanding their core purpose.”
ESG front and centre
According to Andy Sloan, Deputy Chief Executive, Strategy, at Guernsey Finance, this increased involvement of next-generation ideas is driving interest and investment in environmental, social and governance (ESG) issues.
“Covid has brought the issue of ESG home,” he says. “It is a mindset driven by the young, and families are increasingly looking for service providers who share it.”
That presents an opportunity for the industry, given that research shows around 70% of next-generation wealth holders would switch wealth manager given the opportunity. Those who can show they are ESG-ready stand to prosper.
Stonehage Fleming, for one, has responded to more impact-focused investing since the start of the pandemic.
“Some families retreated to protect their capital, but others saw communities struggling in the early days of the crisis and resolved to do something,” Mallas says. “That included putting capital towards SMEs, the homeless and the research and development of Covid vaccines.”
He concedes this trend may have developed without more next-generation engagement, but it would not have been as broad.
“There is a greater sense of urgency,” he says. “We have deployed more capital into ESG over the past 12 months than ever before. We are seeing more families deviate from their core intellectual property and go into unfamiliar areas.
“The scoping of initiatives is much broader for the next generation. They are more attuned to general impact investing that mirrors their own lives, such as plant-based foods or ag-tech. They are more conscious of how they live, travel and interact with their communities.”
According to Mallas, ESG or sustainability labels are often associated with ventures, but often these ventures champion the ‘E’ and have poor ‘S’ and no ‘G’ at all. The next generation, he says, is looking to change that.
“We have been approached to put together reports that show how a family’s assets are being utilised from an ESG perspective,” he says.
“For the first time, we are receiving questions about the carbon footprint of banks or what the composition of the board is from a diversity perspective.
“We are spending a lot of time with families sifting between genuine ESG programmes and ones that have merely painted over it with an ESG brush. We are doing deeper dives on companies and asking what their ESG data looks like.”
Balancing act
Mark Biddlecombe, In House Legal Counsel at PraxisIFM Trust, argues that this more intense focus on investments raises questions around balancing ethical considerations with the fiduciary duties of a trustee.
“For trusts established under Jersey and Guernsey law, the starting point is their statutory obligation to preserve and enhance the value of the trust property,” Biddlecombe says.
“Once, it was seen as contrary to your fiduciary duties to consider ESG investing because it meant market underperformance. Now, you need to consider the impact on the value of the trust if you ignore poor governance and sustainability in businesses.
“Because of the Greta Thunberg effect –[the climate-change campaigner has helped raise the profile of environmental issues and enhanced the glare on corporates’ attitudes to them] – companies are being judged in a different way and won’t survive if they don’t pay attention to their carbon footprint and other ESG considerations.”
The key, he says, is acting in the best interests of the beneficiaries. For some families, that may mean blocking any investments in companies involved with alcohol or tobacco, and perhaps acknowledging that this could lead to lower financial returns; for others, it will mean incorporating ESG but not sacrificing money growth.
“It is too simplistic to say the next generation doesn’t care about returns. Many of them do and still expect you to enhance the value of their trust fund,” Biddlecombe states.
Sloan agrees. “Families and advisers have to stay grounded amid the ESG rhetoric. Central to this is maintenance of and return on capital. That is key and you mustn’t get away from that.”
Whatever the approach, it is vital to incorporate growing ethical concerns and priorities into trust documentation.
Guernsey Finance has worked with law firm Ogier to produce a guide for private wealth and family offices in developing sustainable trust deeds.
It features a series of draft clauses enabling them to build sustainability into their client offerings, and ‘demonstrate that sustainable investing can be compatible with the duties of the trustee’.
Example clauses include: ‘The trustee shall have the power to invest in sustainable investments’ and ‘The trustee shall consult an investment adviser in relation to socially responsible investing before exercising any function’.
“Most family offices will want to ensure they have incorporated these issues into the investment approach, that their providers are on board and that their structures are properly worded to take these into account,” Sloan says. “It is core and central to the offer, not a ‘nice’ supplementary anymore.”
He hopes it will also enhance the attractiveness of Guernsey to international families. “We are signalling to providers and clients that if you are looking for expertise in this area, come to Guernsey.”
Biddlecombe praises the initiative. “Trustees will be able to use the guidance to reduce any tensions between what the trustees feel and what the families feel about ESG and any impact on financial performance,” he states.
Regulator attention
He believes ESG will continue to be part of the fiduciary landscape for some time to come and increasingly stoke the interest of regulators. “In the UK, pension trustees must already demonstrate how they have dealt with ESG factors in their investment decisions,” he explains.
“It is not a stretch of the imagination that offshore regulators will be thinking along the same lines. If a trustee with no consideration of ESG factors keeps investing in old-school companies with terrible ESG and the investment suffers, then they will have an interesting discussion with beneficiaries about why they didn’t move with the times.”
Mallas agrees that ESG will continue to be top of the agenda and help engage the next generation. “There have been challenging discussions in some families about the switch in direction, but the pandemic has created a reduction in maintaining the traditional status quo. It is very rare for the older generation to say ‘thanks, but we are sticking with what we know’,” he says.
Technology has helped bridge this gap, with videoconferencing and FaceTime calls replacing formal face-to-face settings.
“Before Covid-19, it was all about proper agendas and the warm welcomes and what-not,” Mallas explains.
“Now, we are having more frequent but shorter meetings online with families, which the next generation is much more comfortable with.
“Our engagement with them has been fast-tracked – I don’t think we’ve ever been closer with them. The founding generation, which used to find FaceTime uncomfortable, is also more relaxed with it – now, they call you.”
John Goddard, HSBC’s Head of Wealth and Personal Banking, Channel Islands and Isle of Man, and Head of HSBC Expat, says that digital will be the core channel going forward.
“It has become a hygiene factor in how you interact with customers,” he says. “It’s about onboarding but also about being there for a big decision such as buying a house or executing investments online.”
Sloan is also hoping to make processes easier for families, including making philanthropic investments such as partnerships with non-governmental organisations.
“We are looking at bringing the philanthropic offer more front and centre to holders of large private wealth,” he says. “We want to provide an A to Z of the various different structures and tools you can use.”
It’s all about offering the necessary ESG services to meet evolving thinking and requirements.
“ESG will continue to accelerate. The wealth firms that react most positively will be the winners,” says Goddard. “Getting that balance right between helping customers grow their wealth and doing it in a way that appeals to them in terms of their own compass is going to be really important. It is hugely exciting.”