INSIGHTS

The last decade has seen Environmental, Social and Governance (ESG) issues play an increasingly central role in the investment process at every level. Once confined to the large board rooms of institutional investors, technology is changing the way many family offices operate and simultaneously giving them access to significant investment opportunities. In this article, IANUA Market’s Co-Founder and Managing Director, Leah Cox, and Impact Strategist Christelle Kupa, discuss how ESG and technology are evolving family offices.

Technology has taken a significant role in the way investment opportunities are identified and engaged with, and, as ever, the up-and-coming generations of family office investors tend to be more tech-savvy than the incumbent ones. This process has coincided with the growing awareness and importance of ESG, and the application of technology has made it easier for all investors to consider this as part of their decision-making process.

Away from the institutional houses, the investment community, whether that’s angels, high net worth individuals or family offices, have traditionally been active either in the industries where they are established, or in real estate. Over the last decade, technology has made it easier for investors to explore other markets, build diversity into their portfolios, and make investments that meet their ESG approach.

Every family office is different, but they are broadly linked through their entrepreneurial approach to investing. Institutional investors look for specific criteria to ensure that an opportunity can match the metrics that they are required to report on. Family offices, however, tend to have a completely different way of looking at things. For them, it’s all about the business builders, their stories and their ambitions.

In many ways, this is natural. The people behind a company are instrumental in determining its future. They make the decisions that move the business in one direction or another. That’s why investors in family offices place such a high value on teams and founders, while institutional investors focus to a far greater degree on the numbers. The fundamental approach is very different depending on which type of investor you’re talking about.

The younger generations of family offices are using technology to cast a wider investment net, to find the stories beyond the sectors where they traditionally thrived and embrace ESG issues, while still engaging with opportunities that offer the potential for solid returns.

As the next generation of family offices emerge and are allocated capital to build their experience and expertise, the clear distinction between the current and the rising generations in terms of ESG is becoming clearer. There has been a lot of discussion about the environmental impact that humanity is having on the planet in recent years and environmental considerations have moved to the very, very top of a lot of peoples’ agendas.

It is not necessarily as simple as environmental awareness, though. We see a lot of interest in emerging industries such as MedTech, AgriTech, BioTech, as well as food and water security, many of which have goals and ambitions that fall under the mantle of ESG. This means that there is an array of very attractive investment opportunities that offer solid returns and take ESG into consideration. Technology, meanwhile, has made it relatively simple to find and participate in these opportunities.

BOTH TALK AND ACTION

While environmental concerns have been talked about over the last three decades, we are now beginning to witness a genuine shift in investment strategies. The Campden Wealth Study of Family Offices 2019 suggested a significant move in portfolio allocations towards sustainable investing, from 19% to a projected 32% between 2019 and 2024, a move the report suggests is unsurprising given that 85% of all sustainable investments have met or exceeded expectations.

Similarly, the UBS 2021 Global Family Office Report[1] showed that nearly a third of surveyed family offices expect to implement an exclusion-based investment strategy to ensure sustainable investments within the next five years, while nearly a quarter expect to implement ESG integrated investments.

With family offices having an estimated USD 5.9 trillion[2] of assets under management globally, any change is likely to have a meaningful, positive impact on the types of projects receiving investment support in the coming years.

CHANGE IS OPPORTUNITY

As with most things in life, it is worth pointing out that ESG is sometimes used as a blanket term, and it can be important to keep in mind what it is actually referring to. There are several investment strategies that family offices can put in place, including sustainable-themed, ESG aligned, UN Sustainable Development Goals-linked strategies, or impact investments. An impact investing strategy is defined by generating significant positive socio-environmental outcomes and requires credible justification, backed with properly performed assessments. Standards such as Impact Reporting and Investment Standards, the Global Impact Investing Rating System, or Sustainability Accounting Standards Board can help frame solid impact investing strategies.

The decarbonisation of the economy over the next few years creates considerable investment opportunities alongside the social benefits. A green industry, with a focus on renewable energy, low-carbon transport, energy-efficient buildings, clean technologies, waste management or sustainable agriculture creates a significant impact investment opportunity for wealthy families.

It could be that ESG has a more clearly defined set of investment parameters than the green investment strategies of twenty years ago, but it is also broader in scope, and technology has helped sharpen the definitions and made it possible to attract liquidity to the market. Either way, ESG’s presence in investment strategies has increased over the last decade to the point where it is set to become a critical aspect to the investment activities of family offices, and technology is making it quicker and simpler for family offices to spot opportunities that are outside traditional comfort zones.