Asian family offices build the case for more ESG

One of the biggest hurdles to encouraging family offices to engage in environmental, social and governance (ESG) investments come from individuals within families.

Michael Au, managing director of single family office District Capital, spoke to delegates at AsianInvestor’s 6th Family Office Forum in Hong Kong on May 20, about the portfolio he manages. He said it has been difficult to persuade the older generations in the family to embrace ESG investing.

“The old phrase they would use is: ‘it's not as effective as straight philanthropy, and it's not as profitable as straight investments,’” he said in the penal discussion.

He noted that some of the family he represents were more interested in philanthropy than ESG investments because they understood better how charities worked so it was a far easier discussion for them.

But by forging closer ties with younger generations of the family and by being transparent about the financial performance of the ESG-centric portfolio, Au said he has been able to earn the support of the older members and encourage the family to participate more in such discussions.

“It's a slow process, a difficult one, but it does open a lot of dialogue among different generations,” he said.

Cara Williams, senior partner and global lead of family offices for Mercer, a consulting firm, also noted that each generation needs to have a different conversation on ESG investing.

“For the first generation that generated the wealth, you may actually have to focus very much on returns,” she said. She pointed out, however, that younger family members tend to focus less on profits but on “investments that make them feel good”.

Au now feels able to take ESG investing in-house, as the family is having more in-depth conversations about sustainability.

“We realised that we had these missed opportunities because we didn't have the discussion internally about sustainable investing and impact investing so other family members were looking elsewhere for help,” he said.

LACK OF DATA

A lack of data and analysis on available products is another reason why family offices in Asia have been more reluctant than those elsewhere to make ESG investments.

“People have every right to be sceptics about the industry, because we are still waiting to see data come through on [the relationship between] ESG and performance,” said Leonie Kelly, project director of sustainable finance initiative for RS Group, a single family office.

Despite efforts by regulators such as the Securities and Futures Commission and the Hong Kong Monetary Authority to drive more ESG investment, investors lack a standard scoring mechanism to identify appropriate opportunities.

Eva Law, founder and chairman of the Association of Family Offices in Asia, pointed out that using existing benchmarks are not without their problems:  "All family offices demonstrate very distinctive investment goals or expect varied outcomes, thus, a universal benchmark is hard to apply for the time being,"

Au said he has enlisted the help of external active managers to help with the listed equity portion of District Capital’s portfolio.

“We work a lot with more active managers who are able to give us a more activist touch on investees and in that way, achieve impact,” he said.

SYSTEMATIC APPROACH

Building an ESG-compliant portfolio, however, could be an entirely different matter as multiple asset classes are involved.

Kelly has developed an approach to achieve 100% sustainability in her family office’s portfolio.

She has built a framework that sets out the purpose of the family capital, assesses the level of risks and understands the degree of impact across different environmental and social issues needed to be created. The framework then allows investors to identify relevant themes and geographies

Kelly said the investing strategy has a core and satellite approach. The core part focuses on liquid and risk-lite assets, such as listed equities, with the satellite proportion taking a more targeted approach that goes beyond liquid assets to create additional impact.

The final component of the systematic approach, adds philanthropy to the strategy. This could mean donating to research houses looking at the analytics of the ESG market, for example.

“Across the three approaches, we look at total impact and aggregate performance of this portfolio that is 100% sustainable,” said Kelly.

The inhibitions of individuals within some families and the need for transparency about performance are challenging advocates of ESG investment. However, innovative solutions are helping family offices look more closely at the growing opportunities within the sector.