How Family Offices and Wealth Managers are Pivoting towards ESG and Sustainability

It's no secret that Family Offices and Wealth Managers have the ability to influence markets and companies, and recently more investment decisions are being based on ESG factors. Capital International shares why it's now fiduciary duty for trustees to consider ESG risk factors.

'It’s crazy that our banks and our pensions are investing in fossil fuels when these are the very things that are jeopardising the future that we are saving for.’’

Sir David Attenborough

It’s no secret that Family Offices and Wealth Managers have the ability to influence markets and companies through the deployment of capital.  Since markets were first established in the 16^th century, the primary focus for investors has always been capital growth and income with next to no consideration of corporate activity. Recently however there has been a paradigm-shift, and increasingly, we are seeing investment decisions being based on Environmental, Social and Governance factors as well as financial returns.

The perceived wisdom used to be that investing using sustainable or ethical criteria was detrimental from a performance perspective due to a reduced universe of investable assets and that this went against a trustee’s fiduciary duty to invest trust funds prudently. Thinking has moved on significantly, to the extent that it is now a fiduciary duty for trustees to consider the Environmental, Social and Governance risks factors when making investment decisions.

We are an Isle of Man headquartered Banking & Investment business, offering a range of ESG investment solutions to trustees as well as institutional and private clients. As a signatory to the UN Principles for Responsible Investing, we are committed to investing for a sustainable future, and as a business we have set ourselves the ambitious target of becoming carbon neutral by the end of 2025.

With the UK hosting COP26 in October, there has been increasing focus on the Paris Agreement and countries’ Nationally Determined Contributions. Whilst Europe, the UK and latterly the USA have set increasingly ambitious targets to reduce emissions, many of the worst emitters in emerging markets are yet to make meaningful commitments to decarbonising their economies.     

We are also becoming increasingly cognisant of the importance of biodiversity from an investment perspective, and we assess the impact that companies have in terms of land use and nature loss. This involves closely inspecting the entire length of a company’s value chain to determine whether they are managing natural resources sustainably. In 2022, COP15 will look to enact a set of goals for Biodiversity based on the Paris Agreement framework that will obligate countries to protect nature. This is already happening through initiatives like 30by30.

Climate Change and Biodiversity are interwoven. Often the worst emitters are also those that are actively destroying biodiversity in pursuit of short-term gains. There is no doubt that legislation and regulation will force these companies to adapt their business practices or face debilitating fines and sanctions.

As investment managers, we can either continue investing in ESG laggards that will face increasing headwinds and costs, or we can make a positive decision to invest in companies that are focusing on future-proofing their business and returns to investors through sustainable development.

We have identified four key areas across industries, geographies and asset classes that enable investors to preserve and grow capital:

1. Clean Energy
2. Sustainable Agriculture
3. Water & Waste Management
4. Healthy Living & Nutrition

We have no doubt that ESG is a permanent and increasingly important element of investment management and not just a theme or passing investment trend.  As highlighted in the very recently published IPCC report, which concluded for the first time that human activity is ‘unequivocally’ warming the planet, ‘major changes to the planet are now inevitable and irreversible, but there is still time to avoid a climate catastrophe’.  It is therefore clear that if we don’t address the challenges of climate change and biodiversity loss now, future generations are going to experience increasingly volatile financial markets and investment returns, as well as extreme climate conditions.

As an International Finance Centre, UNESCO Biosphere and signatory to the Paris Agreement, the Isle of Man provides an ideal home for family offices and institutions to establish and manage portfolios that mitigate climate change and are managed in harmony with nature.

Find out more about why the Isle of Man is the natural choice for Excellence in Finance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.

Please note: Capital International Bank holds a Class 1(2) Banking Licence under the Isle of Man’s Alternative Banking Regime and is not permitted to serve retail clients.

Regulated activities are carried out on behalf of Capital International Group by its licensed member companies. Capital International Limited, Capital International Bank Limited, Capital Treasury Services Limited and Capital Financial Markets Limited are all licensed by the Isle of Man Financial Services Authority. Capital International Limited is a member of the London Stock Exchange. For further information visit capital-iom.com

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