The role sustainable and impact investing can play among families in saving the planet has slowly emerged to the forefront of western thinking, but families in Asia have already been putting theory into practice for years as a matter of survival.
Geoffroy Dedieu (pictured) has more than a decade of experience in socially responsible investing (SRI), environmental, social and corporate governance (ESG) and Impact Investing for ultra-wealthy families. He is an experienced single-family office manager who set up and restructured family offices, private funds and family investments holdings in Europe and Asia.
As the head of European family offices for FamilyOfficeHK, Dedieu helps families with governance processes, family constitutions and conflict resolution. FamilyOfficeHK is a dedicated body of the Hong Kong Government working with family offices. It is a joint effort between Invest Hong Kong, the Financial Services Development Council and the Hong Kong Monetary Authority.
CampdenFB asked Dedieu for his perspective on the key findings of the new Investing for Global Impact: A Power for Good 2021 research report by Campden Wealth.
A notable 70% of the families, foundations and individuals surveyed told Campden Research the transition to net zero has become “the greatest commercial opportunity of our age” as it represents a chance to benefit from the companies and innovations addressing climate change.
Almost one-third (30%) of global wealth holders are targeting investments that directly support a transition to a low carbon economy, and 24% are seeking to avoid any companies they assess as major contributors to the issue of climate breakdown.
What is your reaction to this change in attitude? Should such private sustainable investors take the lead in the global transition to a low carbon economy?
In Asia, families are leading the charge on impact investing, they are pulling the rest of the financial services sector forward. I see this as an opportunity for ultra-high net worth families to contribute to the paradigm shift in investment and wealth management. Hong Kong families in particular have long been trailblazers.
Nowadays, when families in Asia define their values and the deriving goals, they naturally touch on several of the United Nations’ 17 Sustainable Development Goals (SDGs). This was the case even before 2015 when the SDG’s were announced. For example, family foundations active in the fields of youth protection and education in Hong Kong, such the Yeh Philanthropy, have been impacting Goals 4 and 5 for decades.
Those surveyed said they had accelerated their portfolio allocations to sustainable investing, during the pandemic, to an average of 36% in 2020, up from 20% in 2019. The average allocation was predicted to rise significantly to 47% in 2022 and to 54% by 2027.
Are you seeing this remarkable increase among your families?
Family-owned enterprises in Asia have been upgrading their governance processes since the Global Financial Crisis. This has also led to the adoption of ESG principles and SDGs. Many listed and non-listed family enterprises now publish sustainability reports in which they describe sustainable investment processes and progress in great detail.
Asian family offices are updating their investment policy statements or investment guidelines to include the UN Principles for Responsible Investment (PRI) as well.
Respondents said that despite market volatility stemming from the pandemic, impact investments proved resilient by delivering solid financial returns in 2020. For most respondents, their returns met (60%) or exceeded (19%) expectations. Of those surveyed, 80% said investors did not have to forfeit financial returns for impact. Additionally, 36% said they engaged in impact because they believe incorporating sustainability considerations into investments will lead to better investment returns/risk projections, up considerably from 24% in 2020.
Have your sustainable/impact investments met or exceeded your expectations and, if so, how and by how much?
The jury is still out on the correlation between ESG criteria and performance. But it is undeniable that ESG and impact investing measure, manage and therefore reduce risks. Families invest with a generational horizon; risks matter as much as returns. Socially responsible investing and ESG have placed secular risks on the investment risk radar of families.
On performance, it is not easy at this stage to try and ascertain correlations. They will continue to be disputed. We will need several years of clearer and stricter regulation, such as the EU taxonomy for sustainable activities, in order to have useful ESG statistics.
For example, we cannot assume that any relation, or correlation, between ESG and performance would be linear. Research models have shown more than 15 years ago that there should be an optimal level curve. We do not even have the robust data necessary to demonstrate what that optimal level could be.
Almost all respondents said they believe progress has been made in relation to the sophistication of impact measurement/management practices (98%), the availability of professionals with relevant skills (93%) and data on investment products/opportunities (92%). However, the top three challenges sustainable investing is perceived to face in the coming five years include: an ability to demonstrate social/environmental impact (45%), greenwashing (42%) and not having a common language to describe impact performance (38%).
Has such progress been made in your experience? Do you face these challenges and what can be done to resolve them?
The EU Sustainable Finance Disclosure Regulation (SFDR) and taxonomy regulation have moved the needle, and other markets are adopting or looking at ESG. In Hong Kong, the Securities and Futures Commission issued ESG guidelines this year, which will boost interest into ESG and impact investing objectives. Most family offices in Asia have already adopted PRI and ESG guidelines.
But I agree that current data is unreliable. Current figures are largely interpretative and based on each managers’ opinion about what is or is not sustainable or impact investing. The data is currently unreliable and subjective. After 3-5 years of taxonomic rigour, maybe we will start to get reliable data.
This being said, there is an incentive for family offices and private funds to do their own bottom-up research. A traditional equity analyst looking at a security should in any case incorporate ESG in his analysis, as these are significant risks factors, particularly in the frontier markets of Asia. One cannot analyse an EM/FM security without looking at the sustainability of the business.
My advice to families on this: use databases as they are making progress, but do your own homework as well.
A remarkable 80% of respondents said climate change is relevant to their investment portfolios. Awareness of one’s carbon footprint is on the rise, with 25% of respondents now knowing their carbon footprint, up from 19% in 2019. Of these informed investors, 50% consider their carbon footprint when making investment decisions, while 40% use it to actively manage their footprint downwards.
How does knowledge of an Asian family’s carbon footprint influence their investment strategy?
It is likely that family enterprises and family offices in Asia will not only look at their CO2 footprint but greenhouse gas (GHG) footprint. It also looks like biodiversity footprint will become a key measure as well.
On the business side, many family businesses in the region already adopted the ISO 14000 series of norms, which include footprint calculations for GHG, water etc.
From 2022, people in Hong Kong will be charged for home refuse disposal by the weight. And we will have to sort our waste in 11 different categories. Thinking in terms of our impact comes a lot faster when you have to pay for each additional kilo of rubbish you produce!
Just over half (51%) of respondents believe impact investing and philanthropy would benefit from the use of blockchain technology, pointing to potential benefits for inclusivity, transparency, traceability and credentialism. Additionally, 43% agree blockchain and crypto assets should be used to accelerate financial inclusion.
Do you think blockchain would be useful in impact investing and philanthropy? Do your families use or are considering using blockchain technology in their ventures?
At the present, few Blockchain solutions offer a satisfying level of transparency on their environmental footprint. Current data indicates that the technology is not environmentally friendly. The sector is in dire need of ESG transparency.
In frontier markets in Asia, the key driver of financial inclusion is mobile technology. When one looks at the platforms available, one notices that they are often low-tech, they use old phones, which are affordable to the wider population. Mobile payment is the greatest financial inclusion driver in our region, and it does not require or even support blockchain.
While most respondents (63%) agree impact investing is being driven by the next generation, many (61%) also believe it is now being embraced by the current generation. This is creating, what 57% note to be, a bridge between older and younger generations.
Has that been your experience among your families? How can multigenerational families use impact investing to improve relationships?
There are two aspects for entrepreneurial Asian families. The business and the family.
For the family enterprise in Asia, ESG is a matter of short to medium-term resilience, i.e. survival. Many frontier markets in Asia are facing environmental changes that directly threaten the survival of the business. This is the urgency for the entrepreneurial family in Asia.
On the private side, Asian families have been “returning to society” for centuries. We have in Hong Kong some of the oldest foundations in Asia. In our region, philanthropy is part of the fabric of ultra-wealthy families. Wealth and social disparities in Asia pose far greater challenges than in Europe because of the scale of disparities. But although the stakes are high in Asia, the ability to adapt and the willingness to change are phenomenal, giving impact investing a formidable opportunity to deliver results.
Research into family dynamics has shown that what matters most is to actually have constructive, structured conversations. Family charters, or constitutions, often contain a whole section about family meetings and to facilitate conversations to create a multigenerational dialogue.
ESG and impact are the greatest challenges for family offices, wealth managers and asset managers.
They are centennial themes of massive consequence. But at the same time, they are providing families with the most formidable conversation theme.
Impact and ESG are creating the sort of interaction, debate and collaboration which keep families alive.