Today we published some initial thoughts on how family offices can embark on their own “sustainability investing” journey, based on our experience working with family offices. Building on this article, we outline below some of the main challenges we see when family offices try to figure out what “sustainability investing” means to them and how to transition their current wealth management approach to incorporate their sustainability preferences.
(1) Deciding which issues the family office consider most important (for the world and for the long-term success of the companies they invest in)
For instance, would investing in “gender equality” help improve portfolio performance (as research shows that firms with more women in management positions outperform their peers) and help tackle climate change (given that women tend to take into account the broader interests of children and communities when they make decisions about resource use and investment)? Or would it make more sense to invest in technological innovation, to improve energy efficiency in all sectors, increase food security whilst reducing the environmental impact of agriculture, and move towards a circular economy?
These are complex questions with no straight answers. Personal beliefs will ultimately drive preferences. So as a first step it is important for key members of the family office to discuss these various options internally to build a consensus and a common vision.
(2) Deciding what are the best levers of change (from a portfolio management perspective)
For instance, a fundamental question for family offices ought to be: “Do we want to ensure that, from now on, all our investments (across all asset classes) will take into account sustainability issues or do we want to focus a percentage of our asset allocation to high impact sustainability investment strategies where the positive impact can be clearly measured?” In other words, would we rather invest in small innovative firms commercialising products and services that are addressing global challenges such as water scarcity, or would it be more effective to invest in large food & beverage companies that have made a commitment to reduce their water intensity by 20% in the coming years? Should we divest from oil & gas companies with high exposure to stranded assets or should we invest in the most progressive ones and engage with them on how they can transition their business models?
These types of questions will help determine how broadly and how deeply sustainability can be integrated across the different types of investments. It will also create some alignment between the family office’s investment philosophy and its approach to sustainability investing. Finally it will help identify which sustainability investing approaches make more sense in a particular family office context (e.g. exclusion, thematic investing, best-in-class screening, ESG integration, impact investing … etc).
(3) Deciding how to transition the current portfolio management approach to integrate sustainability preferences
Once the family office’s sustainability investment strategy has been developed, it needs to be operationalised and implemented in the existing investment processes. This raises questions regarding the need to train the investment teams (e.g. to identify material sustainability issues, assess them and reflect them in their valuation models), the type of additional data that might be needed (e.g. company ESG data but also fund data if the family office is investing through external fund managers) and where to source it from, and which aspects of the investment process should be in-sourced vs. out-sourced (e.g. deal sourcing in the context of private equity, or proxy voting and engagement in the context of listed equities, could be done either by the family offices’ portfolio managers or by specialist service providers).
This transition will not happen overnight. It will take some time to adapt investment processes and see meaningful changes in portfolio holdings resulting from the systematic incorporation of sustainability preferences.
Whilst the outcome of the change management process will be unique to each family office, we believe a family office’s “sustainability investing” journey can be accelerated by learning from the experiences of institutional investors and by connecting with other family offices that have already gone up the learning curve.
