It is no overstatement to say that responsible investing is sweeping the investment industry, writes Darren Kelland.
In some ways, this is simply a reflection of a changing world. Greta Thunberg, the 16-year-old activist from Sweden, is a striking example of a generation's growing impatience with empty promises, virtue signalling and inaction. In her appearance before the US congress, she implored them not to ‘listen to her'. She asked them to listen to the experts - the scientists - and take action with that information.
A new generation of investors expressing similar concern and making similar demands for how they want to see their money invested, their wealth grow, and the impact this can have in support of positive change. This demands new answers from their investment advisors and trustees, especially for proof of actual impact.
The younger generation's focus on evidence and impact means advisors at all levels must be prepared for interrogation to see if they are offering a product that really does fulfil their objectives"
The emerging wave of investors want routes for investment and philanthropy that represent the most sensible, informed and mature mindset for achieving long-term return. As much as this illustrates an awakening social conscience, it's as much a return to the fundamental and best practice principles of investment.
A seismic shift in fund management and investment decision making
The previously dominant model for responsible investing was one of avoidance. A fund could simply exclude any investment in tobacco, arms, fossil fuels, or other ‘bad actors' - and call itself an ‘ethical choice'. Little attention seemed necessary to the rest of the portfolio, or whether the immaculate fund was having any positive effect on the world.
ESG investing considers a company's impact on the environment, but also the people it employs and its community. There has been no shortage of stories in recent years of companies causing long-term damage to society or the environment, and these are striking a deeper chord with the public. Corporate crises such as the BP oil spill or the Olympus accounting scandal illustrate how ignorance of the ‘ESG factor' can affect a company's share price and investment portfolios.
Analysing companies for their ESG credentials also provides a means of understanding its thinking for long-term profitability and growth. Many studies have found that ESG investing improves downside protection while improving upside potential, a win-win situation for any investor.
That said, there's a substantial difference between ESG-badged products being introduced by mainstream houses and a more bespoke approach offered by a wealth manager or family office. The younger generation's focus on evidence and impact means advisors at all levels must be prepared for interrogation to see if they are offering a product that really does fulfil their objectives.
HNW families want satisfying investments - not ‘satisfactory' ones
The shift we are observing is taking place not only among major fund management groups, but also among high-net-worth investors and the people that guide them. The desire to make a difference is fuelling growth of impact investing and professionalisation in philanthropic strategies. As in the case of ESG, the motivation is to invest for good and encourage organisations to drive change.
Recently, Hawksford was working with a client with a background in medicine. This individual was driven by a desire to achieve a substantial difference towards problems they had observed first-hand. This was not a sophisticated investor - but a profoundly intelligent and passionate individual who would not be satisfied sitting back offering money without oversight.
Charitable organisations are ready to drop donations into existing processes, but seldom have the time or capacity to step back and consider larger reform. Increasingly, impact investors are seeking board involvement and ongoing governance to make sure useful change is taking place.
With its medically trained philanthropist, Hawksford helped develop a governance structure that ensured appropriate guidance on fiscal matters and an ongoing emphasis on responsible investment decisions so the client could apply their ideas to achieve results.
The real reward for philanthropy is less about the donor's ego, and more about having left the world a better place. This is an especially strong trend in wealthy individuals whose fortunes were earned in the last few decades: especially among technology entrepreneurs. A passion for solving problems and data was what many drew upon to build their fortunes - why shouldn't they apply this discipline to their philanthropy as well?
At Hawksford, we can see the ripples of impact investment through the entire investment ecosystem: from wealth administration and governance, the decisions of fund investors and all the way to family offices and individual HNWs whose donations are gauged in billions, not millions. We are evolving the support we provide to better answer the demands of a generation that wants more data and engagement in the investment process, as well as a deep understanding of the end-point organisations and proof of results.
This shouldn't be considered revolutionary. In practice, this is simply an opportunity to fulfil the first and most important duty of a trustee: ensuring the trust is conducted fully and properly for the benefit of those intended.
Darren Kelland is global head of Private Client Services at Hawksford