Like their counterparts in Asia, family offices in America are increasingly concerned about climate change and other environmental, social and governance (ESG)-related issues.
On a recent visit to New York, AsianInvestor spoke to family investment managers and advisers about where and how they are applying their version of 'conscious capitalism'.
“ESG and impact investing are huge in the family office segment," New York-based Rich Nuzum, president of the wealth division at Mercer, told AsianInvestor.
Family office investors fall into one of two types, he said.
Some families reflect their personal views in their philanthropy and their investment portfolios help to fund that, whilst keeping the two apart.
But other families will reflect their ESG beliefs more directly through their investment portfolios.
That’s when the problems start, he said, because while families may agree on the need to adopt ESG principles, they can fundamentally disagree about the way to do it.
“If you don’t have a strong patriarch or matriarch, or a strong family member who’s calling the shots, a debate will erupt,” Nuzum said.
One such debate he witnessed involved a husband and wife discussing the best way to feed the growing world population. “They are both smart, but she’s pro-organic and he’s pro-genetically modified crops. Whatever the merits of their respective arguments, they both would like to reflect ESG in their portfolios. They just have diametrically opposed views on what that means for agriculture.”
One thing US family offices have in common with their Asian equivalents is that, as the money transfers down the generations, ESG issues become a far more important determinant of investment behaviour.
And it is in the private markets that family investors are most able to direct their money in line with specific issues, Michael Zeuner, managing partner of New York-based WE Family Office, said.
If they want to focus on gender issues, for example, this can manifest itself in multiple ways, he said. It can be women-led funds or investing in companies that are focused on women’s business opportunities.
“Sometimes there are private companies that hit the centre of that; their general partners are women, they are investing in women-led companies and those companies tend to be oriented around the women’s market.”
Some of the oldest US family dynasties have a long history of responsible investing. Jimmy Chang, managing director and chief investment strategist for Rockefeller Capital, which manages the seven-generation wealth of the Rockefeller family, told AsianInvestor the foundation has been active in responsible investing since the 1970s.
“At the time when the fourth-generation Rockefeller family came into money, they wanted to align their investments with their values. Initially it was focused on a few key areas such as education and healthcare, while at the same time pressuring companies not to do business with oppressive regimes, such as the South African government during the apartheid era.”
Over time, this investing philosophy has evolved, with the environment taking an increasingly important role. “Today we have become very specialised and integrated, so we take these considerations into our everyday investment approach,” Chang said.
The move away from pure philanthropy to impact investing is another trend reflected by US families. And in recent years, this investment is done with more of a global perspective, Nuzum said.
“For example, I’ve heard it articulated that ‘the US government is taking enough of my tax dollars for US problems. We have a huge income disparity between the US and the rest of the world. I’m going to invest outside the US because they really need it,’” he told AsianInvestor.
He added that in choosing to target developing nations and specific issues such as education or children’s health, there’s a critical mass issue that investors need to consider.
“When you are trying to make an impact investment, it’s easier if other people have already created some of the infrastructure, so you can throw money behind something that’s already working and scale it,” Nuzum said.
Trying to set up the first school in the country for girls – while hugely impactful, would also be extremely difficult. “Finding someone who has already set up a couple of schools in Africa and helping them set up three more, you’re going to see a lot more social return on your investment in a shorter time span,” he said.
Climate is becoming the number one issue for family investors and Mercer recently released a report that focused on the subject and its implications for strategic asset allocations.
That reflects the growing concern among investors with reasonably long time horizons about how best to manage the material risks they might face as a result of climate change.
“The question we are asked most often by asset owners is 'how do we incorporate climate change into our asset allocation',” Nuzum said.
The short answer is don’t wait for the science to prove the physical impact.
CO2, a known greenhouse gas, is what economists call a negative externality — a detrimental product that is not priced (or charged for) by any market. As a consequence of not being priced, there is no market mechanism responsive to the costs of CO2 emitted.
“If you believe there could be a policy response to the growing threat of climate change - that carbon could get a price - when that happens you are going to get a stagflationary shock on all your assets. Everything will get priced lower, because you’ve got an externality that’s not been priced in,” Nuzum said.
To avoid that happening to their portfolios, investors could hedge the risk by investing some of their money into a diversified impact portfolio.
Because when carbon does get priced, at least “that part of your portfolio will shoot through the roof,” he said.