Next-geners may not have family clout to drive ESG investing

More interest but uneven uptake of environmental and socially responsible investing among ultra-high-net-worth investors.

Author of the article: David Israelson  •  Financial Post

Family offices and their advisors are looking more closely these days at investments that follow responsible environmental, social and governance guidelines and seek to have a positive impact on the planet.

“We are seeing not only more interest but also a broader uptake in responsible investing mandates among our clients,” says Chris Clarke, family office director, founder and chief executive officer of First Affiliated Integrated Family Wealth Management.

“I can’t speak for everyone in the family office field, but I would say our clients under 60 are coming to us with responsible investing in mind, and some of the older clients are coming on board because they’re being encouraged by the younger family members,” she says.

While the trend is noticeable, it’s not universal.

Responsible investing criteria tend to get more attention from larger businesses than from smaller ones, says Robert Bezede, a director at Norton McMullen Corporate Finance Inc. in Toronto and an advisor for small and medium-sized businesses.

“It’s a big consideration for larger businesses, say with $500 million in revenues, but not as much for businesses up to $50 million – it’s not as big,” he says.

Agreement on criteria

It can be complicated to agree on what investments meet ESG, responsibility and impact criteria, says Mark Auger, enterprising family office advisor and co-founder and chief executive officer of Crysalia, based in Montreal.

“ESG and impact investing is more of an institutional mindset than one that affects families directly,” Auger says. For many family offices and businesses, ESG and impact investment considerations are already built in.

“They’re thinking long-term and holistically, rather than about having to please outside directors or shareholders. Enterprising families look at how they will continue to be relevant and continue to serve the communities in which they operate,” he says.

“I know a lot of younger family members involved in family offices who are speaking out about socially responsible investment, but they don’t always have the clout within the family,” Bezede adds.

Family offices share one of the challenges that all investors face when considering environmental, social and governance (ESG) guidelines, or socially responsible and impact investing — agreeing on exactly what these terms mean.

ESG refers generally to standards to follow that are either good for, or not harmful to, the environment, are socially progressive and to businesses that are operated and overseen by management and directors who follow transparent and ethical standards.

Socially responsible investments go a step further, seeking to have a positive effect — for example through clean technology. Impact investments extend this even more, seeking to bring about specific, positive change — for example, by aligning their products and factories with the United Nations Sustainable Development Goals, which are key metrics for addressing climate change.

I know a lot of younger family members involved in family offices who are speaking out about socially responsible investment, but they don’t always have the clout within the family.

ROBERT BEZEDE, NORTON MCMULLEN CORPORATE FINANCE

A big problem for those who seek to be responsible investors is that the criteria are often vague, subjective and overlapping. There are also many different criteria for measuring ESG, responsible and impact investing.

At the same time, the whole field is evolving, as portfolio managers seek to meet a rising demand among all investors for holdings that can be labeled as ESG and impact investments.

Interest in ESG growing

Research suggests that high-net-worth investors are certainly interested in ESG and impact investing. In 2017, a study was conducted among investors with at least $10 million in investable assets by Ontario’s MaRS Discovery District and SVX, an impact investing platform for startups and new impact-oriented ventures.

The survey found that 90 per cent were interested in impact investing, and 52 per cent either had already made impact investments or were interested in doing so within a year.

Those surveyed were most interested in investments in energy and clean technology, health and wellness, food and education. And consistent with Clarke’s observation, younger investors tended to be most interested in impact investing options.

Auger sees this as well. “A number of studies are showing that next-geners are embedding [socially responsible] investments within the underlying traditions of the family business,” he says.

“We’ve noticed in some enterprising families that younger members are sometimes intimidated by the breadth of the family’s resources. They feel responsibility because they were not the wealth creators and they see the inequality. They look for situations where they want to address social inequality,” Auger adds.

Such enterprises can also be quite profitable. For example, Philip Cutler, 32-year-old scion of a wealthy Montreal family, started Paper Education Co. Inc., an online tutoring company, after noticing that well-off students had access to private tutoring while others did not.

Paper’s revenues have risen from $1 million in 2019 to an annualized $50 million this year, the company says.

How family businesses go about tilting their enterprises toward social responsibility depends on the particular makeup of each family and its holdings, Auger says.

Outside help

“Some families have stewardship of enterprises that are quite significant in size and scope, and so more and more look to outside consultants to frame the conversation about social responsibility,” he says.

Using professionals to determine what investments meet social responsibility criteria is important both within the family and for outsiders, Auger explains.

“It enables everyone to harmonize the language they use to describe what their businesses do.” Using objective, external ESG and impact descriptions “is an important communication tool. It can convey the constructive role that these families’ enterprises are playing,” he says.

While some families set up foundations, ESG investing is simply another way to bring about change. “If you’ve got the right values, then you have opportunities to help solve some of these social and inequality problems,” he says.