As ESG is becoming the new pillar of asset allocation, major institutional investors in the region share insights on how to incorporate ESG in investments in a webinar organised by Natixis Investment Managers in partnership with AsianInvestor.
The need of family offices to adapt their capabilities is set to sharpen in the coming few years. It's a requirement that is set to gain increasing urgency as more family wealth is passed wealth between generations over the coming few years.
An upshot of that transfer could combine an increased use of technology with a rising engagement with environmental, social and governance (ESG) considerations, say experts.
The transfer of wealth between generations is becoming increasingly important. Many Asian families have either recently or will soon transfer assts from an aging first generation of entrepreneurs and business founders.
This shift will require family offices to consider new priorities. Some families will seek succession planning to minimise the chance of squandering wealth; others will have new goals as the second or third generation take over.
“For some, the family office is merely an investment vehicle, but others will have a much broader aim of building a family legacy and developing impact outside the family,” said Gary Tiernan, managing partner of Singapore MFO Golden Equator.
“For this reason, I think the single family offices will seek to draw in more qualified staff. The challenge for this will be the willingness of families to objectively engage new staff in the other areas.”
A Deloitte 2019 paper stressed the need of family offices to change how they operate, according to the “changing requirements of their principals”.
“Where the founding principal may have delegated wholesale the administration of household affairs as well as business matters to the family office, incoming tech-savvy next generation stakeholders may find the provision of concierge-like services to be intrusive. They may not want the family office scrutinising their phone bill or organising their travel itinerary.”
It is also likely to lead to a greater consideration of ESG, said Philo Alto, CEO of Hong Kong-based philanthropic capital firm Asia Value Advisors.
“The younger generation is more astute with the sustainability aspects of their businesses and philanthropic affairs beyond the legal entity confines of their businesses or family foundations," he said. "They will be more locked in on the social and environmental purposes that they care about.”
Indeed, ESG is expected to be one of the dominant drivers of family investment for the foreseeable future.
Philanthropy and impact have become increasingly interlaced as wealth passes to younger generations and families establish mission statements to guide their long-term investment ambitions.
Alto believes that investing with a sustainability framework will become part of mainstream thought for many families. “Some family offices including the RS Group will continue to go further with their ‘total portfolio’ approach to asset allocation.” he said.
Hong Kong-based RS Group is a pioneer in ESG investment in Asia. It lays a sustainable development framework over its investments, grants and programmes, to ensure consistency across all the areas. Others may begin to follow suit, noted Alto.
“Many Asian families have been involved in philanthropic endeavours over the years and this is unlikely to diminish,” he noted. “However, what is clear is the increasing focus on impact. Human and economic progress is driving a shift towards sustainability in the investment landscape.”
The 2019 UBS survey indicated that 62% think most family offices will invest sustainably by 2022. At present, just over a third (34%) of all family offices globally invest sustainably. Beyond social inequality, a large majority of family offices (82%) assert that the world’s wealthiest individuals will increasingly tackle global challenges normally reserved for governments.
The impact of Covid-19 could potentially accelerate this shift towards more sustainability considerations.
The impact of the pandemic looks set to substantially alter the investment outlook for families. Even before its onset, astute family office investors were preparing for an economic downturn. The 2019 UBS report indicated that 55% of family offices were investing on the assumption that global markets would enter a recession by 2020.
Most did so by realigning their investment strategies to mitigate risk, increasing cash reserves and preparing to capitalise on opportunistic events.
With the pandemic now having enormous repercussions for economies and markets alike, Singaporean single family office head Cheong Wing Kiat thinks the social implications of the pandemic will cause families to reaffirm their values. Family patriarchs may resolve to pay more attention to nurturing different branches of the family. In some cases, it may accelerate the generational shift of influence on family affairs.
Alto agrees. “The older generation will mainly be calling in their relationships to help manage through the crisis. The younger generation will be handed the opportunity to come up with innovative ideas to reframe and repurpose their businesses in the new post-Covid world.”
He said that the longer the pandemic lasts, and the more protracted the recovery, the more likely there will be major shifts in social norms, daily habits and the ethos of communities.
“Asian families, by virtue of their disproportionate influence in the Asia region as drivers of economic growth and innovation, will likely be among the key drivers of this shift.”
EVOLUTION, NOT REVOLUTION
A combination of Covid-19 and wealth transfers look set to introduce some sizeable catalysts into what the highly conservative mindset of many wealthy families.
That is likely to cause changes for the family office industry. A need for better direct investing skills will be important, as will the ability to sustainably invest and conduct philanthropy. Advances in digital technological are also likely to be important.
Ultimately it will come down to how well families can express their own objectives. The more they work constructively between generations, the easier they will find it to chart a sensible course for their wealth in the years to come.
This article was adapted from a feature that originally appeared in the 20th anniversary edition of AsianInvestor, which was published in late June.
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