Saturday, 08 May 2021

Why Asian family offices are moving towards sustainable investing

By Peter Golovsky

Be it the looming intergenerational wealth transfer, the rising millennial generation or the current pandemic – all of these factors have increasingly influenced investor attitudes when it comes to sustainable investing. IQ-EQ’s Peter Golovsky explains what the key drivers are, and how this changing landscape is triggering a shift in the investment focus of families and family offices across Asia.

Looking at the investment landscape, it is clear that sustainable investing is on the rise. According to the Global Sustainable Investment Alliance 2019, over $31 trillion of assets globally are being managed in environmental, social and governance (ESG) investments, up 34% from 2016.

The Private Bank Sustainable Investing Review 2020 conducted recently by Standard Chartered Bank also highlights the rising tide of sustainable investments which is being further accelerated by the COVID-19 crisis. Indeed, the pandemic has led to a renewed interest in investing in companies that are resilient enough to weather short-term shocks, with 42% of the global investors surveyed saying that they would invest 5-15% in ESG investments over the next three years. A recent survey by Cerulli Associates released in April 2020 supports these trends, with 76% of European banks bracing for a surge in demand for ESG funds.

The family office space is not immune to the siren call of sustainable investing. The UBS Global Family Office Report 2020 released in July said family offices are expected to more than double their allocation from 9% to over 19% in ESG-integrated investments over the next five years.

I believe we are now at a tipping point, with 39% of family offices looking to allocate most of their portfolio sustainably in the next five years. We also see that 62% of families regard sustainable investing as important for their legacies and the next generation. This ties in with the fact that, as a whole, millennials are much more concerned with social and environmental impact than their predecessors have been. Meanwhile, this conscientious young generation is becoming more engaged and having greater influence over family office investment decisions. For the majority of wealthy families in Asia, this handing over of the family wealth reins is happening for the very first time.

 

Factors powering sustainable investing

We see three main factors driving an increase in sustainable investing in Asia:

Looming intergenerational wealth transfer.Asian families are on the cusp of one of the most significant transitions of wealth from the first to second generation. A whopping 85% of Asia’s billionaires are still first-generation wealth creators who will be looking to the next generation to provide stewardship and influence over this wealth.

Rising generation of millennials. Significantly, millennials tend to want to be more involved and actively participate in family investment decisions. Most importantly, they look at investments not just from a financial perspective but also in terms of how such investments impact society and how their investment choices can create a positive future legacy for the family. This shift in attitude is driven in particular by women who themselves are taking much more prominent positions in family wealth and investment-related decision-making.

Impact of COVID-19. COVID-19 has not only heightened recognition of the importance of succession planning, it has brought a special focus on the ‘governance’ pillar of ESG. While tracking some ESG funds recently, we found that they have outperformed the MSCI benchmark index. This phenomenon is particularly evident in key sectors such as health, technology and agritech where companies have called for more sustainable characteristics such as lower debt levels as well as a more prudent and conservative management approach leading to being rated as ‘more resilient’ during challenging times.

 

How are families responding to the call of sustainable investing?

Along with the setting up of a professional family office and renewed focus on tried and tested vehicles like trust and foundations, we are also seeing an increasing interest in private or family funds, private trust companies and, of course, the attractive new structuring solutions that have become available in Asia this year namely, Singapore’s variable capital company (VCC) which launched in January, and the new Hong Kong limited partnership which took effect at end of August.

All of these structures and the governance they provide fit well with ESG objectives and serve as key vehicles to assist families and family offices in providing the necessary stewardship, professionalism and oversight to manage their wealth while allowing greater participation and involvement.

Across the board, we’re witnessing Asian families place increasing importance on philanthropy and social responsibility. We see major families and family offices setting up foundations as beneficiaries of corporate or trust structures for the specific purpose of targeting ESG investments. These have, in effect, integrated achievement ESG objectives directly into the construction of wealth-holding structures. We’ve also seen one prominent Hong Kong family office turn the investment process on its head by insisting on targeted investments in certain ESG sectors such as clean power, clean tech and water sustainability which resulted in a bespoke fund being developed to meet the family’s requirements.

With Asia-Pacific registering the highest increase in family offices (44% since 2018) and over 2000 families set to transition $580 million in wealth from one generation to the next within the next five years, it seems clear that sustainable investing is going to loom large on the Asian wealth management agenda in the years to come.  

 

Peter Golovsky is the Managing Director, Head of Private Wealth and Family Office Services, Asia at investor services firm IQ-EQ.



Keywords: Sustainable Investing, Esg, ESG Strategy, Family Wealth, Legacies, Covid-19
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