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The good money

Associating the word ‘social’ with anything these days usually creates an instant buzz - think social media and social networks. And when it comes to socially responsible investing (SRI) it is young investors who are apparently on trend. A study from Spectrem Group reveals 35% of very wealthy investors under 46 consider the social responsibility of their investments. “If the individual is younger, they tend to be more aware of the issues and think about socially responsible funds more than older investors,” says Catherine McBreen, managing director of the research firm.

As an investment concept, SRI – a term often used interchangeably with “sustainable investment” – is about focusing on achieving good returns while taking into account social, ethical, environmental and corporate governance issues. It is much talked about in the media and has seen huge inflows of cash. Assets under management in green or ethical funds, just one type of sustainable investment, shot up to £11 billion (€13 billion) in 2012 from £4 billion 10 years ago in the UK. In the US, the sustainable investments market has grown by 22% in the past two years, reaching $3.74 trillion in total managed assets.

Sustainability issues, along with financial metrics, are key drivers of long-term performance, making sustainable investing of great relevance to family offices, says Sedef Koktenturk a director at Generation Investment Management, the investment firm co-founded by Al Gore. For this reason, she explains, family offices and sustainable investing are natural bedfellows.

“Family offices are inherently long-term investors that value capital preservation and absolute returns. Given their long-term goal of preserving wealth for future generations, considering the issues associated with the long-term performance of the assets they hold is of critical importance,” Koktenturk says.

Rainer Baumann, head of public equity and member of the RobecoSAM executive committee thinks family offices are beginning to wake up to sustainable investing, thanks to their younger members. “The younger generation … that are just now coming of age were raised during a time when sustainability started to become a more widely discussed topic. Issues such as population growth, water scarcity, climate change and urbanisation are personally important to them,” he says.

“They inherently understand that considering these factors, which are changing the competitive landscape in which businesses operate, is key to preserving their existing wealth.”

But while the young have cottoned on, generally high net worth individuals have proven to be reluctant investors. A study from Spectrem found that when it comes to selection criteria for investments, 94% of wealthy investors consider the level of risk, 89% consider diversity and 81% consider tax implications. The reputation of a company is an important selection criterion for three-quarters of investors. In stark contrast, the study found just 19% considered the social responsibility of their investments.

Perhaps the lack of interest is unsurprising. Many wealthy investors were badly burnt during the financial crisis – right now they are just trying to recoup their losses. The Spectrem study found three-quarters of the wealthy individuals questioned said their lack of interest in the social responsibility of their portfolios was because their investment objectives were purely financial.

McBreen says older wealthy investors remember the first evolution of socially responsible funds, which often did not deliver good returns.

The terminology can get confusing. SRI has undergone a rebrand of sorts in recent years, but those in the industry are keen to distance themselves from the term. Instead of using SRI, firms are switching to “sustainable investment” or similar phrases. Experts argue that this is not simply semantics – SRI tends to focus on negative selection with the aim of excluding “sin stocks”, while sustainable investments are made in companies that meet positive environmental, social and governance (ESG) criteria. The focus now is on what you invest in, rather than what you don’t invest in.

Koktenturk says the shift has been brought about in order to highlight financial returns. Sustainability risks and opportunities directly affect long-term business profitability, she says. 

“Overtime, shareholders will be best served by companies that maximise their financial return by being aware of and strategically managing a broad range of environmental, social and governance factors,” she adds.

But Robert Benson, chief investment officer at US family office Laird Norton Wealth Management (below), says: “Part of the hesitancy on the part of clients toward SRI investments is that these funds typically perform differently to unconstrained investment funds.

“Removing exposure to the energy sector for SRI reasons, for example, alters how the fund will behave relative to a benchmark which includes energy at the market capitalisation weight. When compared to unconstrained indices, SRI funds may experience higher volatility and lower returns in short and intermediate investment horizons,” he adds.

Alongside this, investors are also sceptical of firms claiming to be sustainable. Almost half of those questioned by Spectrem said they felt most companies claiming to be socially responsible in their corporate literature were doing it as part of a public relations exercise.

Sustainable investment’s reputation has also been damaged by a number of scandals. In 2010 some major socially responsible mutual funds and indexes included shares in BP in their portfolio at the same time as the energy giant was behind the Deepwater Horizon oil spill in the Gulf of Mexico, considered the largest marine oil spill in the history of the industry.

RobecoSAM describes what it does as sustainable investing. “We do not consider ourselves to be either an ethical, green or responsible investor,” says Baumann.

Instead he says: “We conduct traditional financial analysis, plus integrate financially material environmental, social and governance factors into our decisions.”

By integrating ESG-factors into the financial analysis, the firm gets a more complete picture of a company’s potential to create value and to manage risk, he says.

“Our aim is to produce above average returns. If we allocate our clients’ money to companies that excel in terms of ESG and have a positive impact on the society at large, then that is a welcome side effect,” he adds.

Baumann (right) gives the example of water – a scarce, heavily used and necessary resource. He says RobecoSAM actively seeks companies that provide solutions to challenges related to scarcity, quality and allocation of water, adding that firms that do this are likely to outperform others over time. RobecoSAM’s sustainable water strategy has yielded positive returns since its inception in 2001.

Gerrit Heyns, a partner at Osmosis Investment Management, shuns terms like SRI and ESG. “[SRI] is an acronym made up by someone in the financial community that thought that responsible accountability constituted a separate class of investment,” he says.

Instead, Heyns argues that firms that have “responsible sustainability” at the heart of company culture are the ones that will be best able to cope with future issues.

Heyns says companies are not becoming more sustainable just to be “good,” they are doing so because it has business benefits. This makes them a good investment.

“The behaviours behind responsible accountability in the corporate world are driven entirely by an economic imperative to better a business. Stakeholders benefit from responsible behaviour directly or indirectly but as a consequence of sound economic decisions, those that account for the needs of both the current and future generations,” he says.

However, one of the big issues curtailing family offices is the screening process for sustainable investments. Asset managers use different methods for deciding what investments should be included in sustainable investment funds. For example, at Osmosis, Heyns says, they make an “objective assessment of the management of the business”. Elsewhere, RobecoSAM relies on the Corporate Sustainability Assessment, an annual analysis it developed that looks at the sustainability performance of more than 2,500 companies covering major indices.

Family offices that take sustainable investment seriously will have to look into funds properly, says McBreen. “They will need the ability internally to screen SRI funds. You will really have to look into the fund, do a lot of analysis and screening. It will be a new kind of analysis for [family offices].”

Geoffroy Dedieu, chief executive of TY Danjuma Family Office, says the UK-based single family office does not have the internal resources to audit all the companies for which it has equity or fixed income positions.

However, the family office, which was the first single family office to sign up to the United Nations’ Principles for Responsible Investing, has set up a “fairly reliable monitoring and reporting process” for sustainable investment, he says. The UN-PRI describes itself as a framework that aims to help investors get better long-term results through stronger analysis of ESG issues in the investment process.

“We have worked intensively with the UN-PRI team, Bloomberg specialists and Oekom [an ESG consulting firm] to set up our ESG monitoring process,” says Dedieu.

At Laird Norton Wealth Management, the firm carries out SRI manager selection and due diligence for those who request this type of investment, although it has “not noticed a material increase in an SRI focus among our clients”.

However, the sustainable funds currently used in clients’ portfolios are diverse. “These funds span the spectrum from an unconstrained equity fund to which an SRI screen is applied, to funds in which the investment managers are very active in prompting social, environmental and governance changes through the funds’ investments,” says Benson.

Multi family office GenSpring says it has several clients who are “interested in socially responsible investing options”. However, rather than funds, the interest is often in impact investing –investments into companies that are making positive social and environmental changes in a measurable way. “The concept of social impact investing is gaining interest especially for those individuals and institutions that want their investments to reflect their core values,” says Christopher Chandler (right), GenSpring’s head of portfolio implementation and investment experience.

McBreen believes there is “a big shift coming”. As sustainable investment – or whatever it is to be called – becomes “less fuzzy”, it will become more popular, she says. “People still want a good return on their investment, but I do think there will be at least a portion of their assets in SRI.”

Koktenturk adds: “SRI doesn’t necessarily mean forgoing investment returns in exchange for social impact to society.” 

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