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Blog November 27, 2019 Rohan Narula

Have You Given Due Diligence To The ESG Factors?

“The burgeoning demand for ESG investments amongst new-generation HNWIs prompts wealth advisors to proactively start a conversation with their clients regarding the same”

 

Andreas Meier, the chief investment officer at Lombard International Assurance stated that The demographics of high and ultra-high net worth individuals (UHNWIs) is changing.”[1] The investment bracket now has a younger and more diverse crowd than before. The views and perspectives of the current investors offer the industry new angles to work upon in order to enhance the services offered. The HNWIs are now demanding effective flow of information, technology-supported communications, deep investment insights, and a collaborative and dynamic approach to managing their investments. Beyond all these newer requirements, the HNWIs are looking for wealth managers and portfolios that are a good match for their social values.

The industry is witnessing an augmented demand for curating portfolios that have a positive impact on society and the environment whilst still possessing the potential to generate good returns. Wealth advisors are now seeking to meet such needs of emerging investor generation and are shedding focus on companies that are positively acting upon environmental, social, and governance (ESG) issues.

Across The Globe

Sustainable investment is an approach that considers and includes the ESG factors for portfolio curation and management. According to a Global Sustainable Investment Alliance (GSIA) review, in five major markets, sustainable investing increased by 34 percent to $30.7 trillion[2] within two years, between 2016 and 2018.

Source: 2018 Global Sustainable Investment Review

In Europe alone, the total assets allocated for responsible and sustainable investments increased by 11 percent to $13.8 trillion over the same time period.

This increase in commitment to sustainable investments, involving ESG factors, is driven mainly by the Millennial HNWIs who are joining the investment sector. The emerging group is highly likely to align its investment portfolio with personally held social and ethical values. 

According to a report by EY[3], inheritable wealth of more than $30 trillion is set to be transferred to the Millennials and this will, in turn, fuel the demand for ESG investments. There are various regulatory and legislative measures being adopted across the world, which are reinforcing the importance of ESG investments in the wealth management sector. One such measure is the Article 173 in France, which mandates carbon disclosure for the listed companies and carbon reporting for investors and investment managers.

A report by The Asset[4] penned down that “More than two-thirds of young Asian HNWIs say their views on wealth differ from those of their parents; almost three-quarters agree it is important to consider ESG factors.” Another study by RBC Wealth Management[5] projected 72 percent of Asian HNWIs agreeing to the importance of ESG factors while choosing their investment options. In league with this study, Michael Reed, head of wealth management, Southeast Asia and chief executive, RBC Singapore Branch stated “In my experience, younger members of Asia’s global families, which are internationally-mobile high-net-worth (HNW) families with financial interests that cross national borders, have been educated overseas and are returning to Asia with new ideas about how to manage family wealth. They increasingly see their investment activity as an extension of their ethical values, leading them to favour ESG factors. The findings of this study further reinforce the increasing desire among younger HNW Asians to incorporate ESG factors into their investment portfolios.”

This drive for choosing sustainable investment portfolios is a universal phenomenon. Rendering socially responsible investment options and employing ethical processes can no longer be an added bonus offered by wealth management institutions. Considering ESG factors has now become an essential part of building an investment portfolio.

Embedding ESG Factors At The Business’s Centre

HNWIs are looking for wealth advisors who have a similar set of values and believe that a transparent and open culture will help them better understand their wealth managers. Their perception is that financial relations can be empowered when they work alongside managers who share the same values as them.

A survey by FactSet[6] disclosed that over 60 percent of Millennials prefer their investment options to be screened based on the environmental, social and corporate governance factors. For the 35-54 years age bracket, there is only a modest dip in this proportion to 53 percent.

Source: FactSet

Embedding ESG factors right at the heart of wealth management institutions makes them both accountable and ethical it is these kinds of firms that the HNWIs are preferring. To 82 percent[6] of HNWIs, working with a responsible wealth advisor and manager is paramount. To the majority of investors the emerging generation the definition of responsibility takes on the form of witnessing and profoundly understanding how connections are being fostered by the companies with the community. They consider transparency in the investment process as the main evidence point. This increase in demand for sustainable investment strategies indicates a shift in power within the investor-manager dynamics.

Open Conversations With Clients

The role of wealth advisors is taking on new shapes and becoming more crucial with the onset of ESG investments. Nearly nine out of every ten Millennials[6] demand that their wealth advisor provide significant insights about the companies that are being recommended for their investment portfolios. The investors expect their wealth advisors and managers to keep them updated on the ESG efforts taken by the companies they are investing in. The emerging clients want to ensure that the investment strategy is aligned with their beliefs and ethical values.

Clearly, setting ESG factors into the core of wealth management practices and conveying this to the investors has become a necessity. For wealth management firms to provide optimal services, initiating conversations with investors regarding ESG investment options and keeping this communication thread active will be highly beneficial. At Legacy, we proactively initiate conversations with our clients and keep them informed regarding their options whilst completely internalizing their requirements and aligning our strategies with their values.

Disclaimer: This blog is published for educational purposes only and does not constitute investment, legal or tax advice or a recommendation or an offer for investment in any market, territory or country. Please consult a professionally certified tax or financial advisor for any investment related decisions. All views contained in this blog are the personal opinions of the author based on publicly available research and news.

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