The ESG and socially responsible approach to investment is winning friends in the wealth sector, such as among multi-family offices.

A study of high net worth US investors finds that up to 58 per cent of wealth management practices working with them employ environmental, social and governance-driven, and socially-responsible, practices.

Cerulli Associates, the Boston-based research and analytics firm, said that many HNW practices using ESG/SRI approaches to managing investment intend to increase their allocations.

Many HNW practices started out with negative/exclusionary screening (such as tobacco and weapons); they have since evolved to offer a wider range of strategies to their clients, including ESG integration and impact investing, Cerulli said in its report, entitled US High-Net-Worth and Ultra-High-Net-Worth Markets 2019: Multigenerational Shifts in Wealth. The data for the report includes responses from almost 50 HNW-focused wealth management executives and advisors, such as multi-family offices, RIAs, private banks/bank trusts, etc.

According to Cerulli’s survey of HNW practices, the most important reasons for using ESG/SRI strategies include environmental concerns (69 per cent), the desire to make an impact with their wealth (54 per cent), and ethical concerns (52 per cent). In addition, nearly one-quarter (22 per cent) of HNW practices using ESG indicate that generating sustainable investment returns is a significant factor for their clients.

“The concept behind ESG resonates with HNW investors due to their comfort levels in investing in innovative areas that provide impact and because of their deliberate focus on sustaining and protecting their wealth,” Asher Cheses, a research analyst at Cerulli, said.

Among those leading the movement toward ESG investing are multi-family offices, many of which are set up to help families pass down their wealth across multiple generations, Cerulli said.

“For many family offices, sustainable investing has become a core component of their investment process that unites family members around common values and beliefs,” Cheses said. 

As chronicled by this publication this year, ESG and related investing styles have become a hot theme in the wealth space, playing to rising concerns – among younger adults, for example – about issues such as global warming, rainforest destruction, child labor, poverty and illiteracy. There is also continuing demand for private and public sector organizations to open up about what they do and be more accountable for their behavior.

One dilemma for ESG enthusiasts is that some of the worst abuses – such as over carbon emissions sand human rights abuses – are in undemocratic nations such as China, where it is therefore relatively difficult for Western investors to put pressure on domestic actors. 

Growth barriers
There are headwinds for ESG, however. One of the main inhibitors to adoption, according to 55 per cent of HNW practices, stems from the sentiment that ESG strategies do not fit into client investment policy statements.

In addition, HNW practices cite high cost (40 per cent), difficulties measuring impact (40 per cent), and lack of track record/performance (30 per cent) as barriers to ESG adoption.

Evidence continues to mount that, for all the skepticism that can sometimes exist, ESG is winning friends. As reported at the end of October, assets managed in ESG mandates by the 500 largest asset managers globally were up by nearly a quarter (23.3 per cent) in 2018, while overall AuM was down by 3 per cent for the year. The US and Europe saw total AuM decline, while the rest of the world saw double-digit growth. These are some of the figures drawn from the Global 500 report published annually by Willis Towers Watson's The Thinking Ahead Institute. The report reminded those asset managers wanting to stand out that sustainability and a firm's investment culture are very much on investors' minds as values increasingly challenge pure profits as motives.