Family offices could bridge ESG and asset management

ENVIRONMENTAL, social and governance, also known as ESG, are big words that used to scare some, but now appeal to asset owners, managers and investors alike. Topics under this umbrella span environmental causes such as climate change to social agendas aimed at promoting workforce diversity, the eradication of racial discrimination and finally, board governance practices and disclosure/reporting standards.

Sustainable investing is now mainstream: The 50th World Economic Forum in January 2020 cited climate-linked environmental issues as having global economic impact over the next 10 years.

How does private wealth feature in this discussion?

The Monetary Authority of Singapore recently observed that foundations, trusts and family offices are well-placed to drive positive change through their investments and business operations. Impact investing serves to "bridge the gap between philanthropy and asset management", said MAS deputy managing director Jacqueline Loh in her keynote speech at the AVPN Virtual Conference 2020 held early June.

In our firm's experience in helping Asian clients set up their family foundation or family philanthropic trusts, ESG has grown in importance. This development has also been cited in the 2019 Global Family Office Report prepared by UBS and Campden Research. It found that more than 25 per cent of family foundations are actively engaged in sustainable investing, with climate change, clean water and health issues as predominant concerns.

Family offices (FO) tend to be smaller than global institutional funds but private capital as an alternative source of funding has more than sufficient clout to make a difference. In addition, FOs move faster and are more agile, often not being saddled with decision-making processes and protocols embedded in institutional managers.

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Our experience also shows that many FOs may not have a set of strictly defined key performance indicators for ESG investments. Instead, they may have a set of common philanthropic values that may be unspoken and evolving within the family, which drives their impact investment decisions.

While there is no standard blueprint for impact investing, ihave found the following guidelines, laid out in the 2014's World Economic Forum (WEF) Report, Impact Investing: A Primer for Family Offices, useful:

a) Vision Casting: Determining through agreement what the family's core values, long-term goals and legacy are so that investment strategies can be aligned, clearly articulated and implemented. This may not be easily achieved if there is a diversity of preferences and goals; though the UN Sustainable Development Goals provide a good road map.

b) Developing appropriate guidelines: There is no "one-size-fits-all" formula to adoption of ESG strategies. Family offices need to ask themselves which approach to sustainable investing is most aligned with their investment philosophy and ascertain how best to integrate ESG factors into their financial analysis matrix. They could adopt the conventional negative (or exclusionary) screening approach to filter out companies operating in "undesirable" sectors and/or expressly include ESG criteria to achieve maximum risk-adjusted returns.

Family offices need to focus only on material ESG factors that impact financial performance; it is neither possible nor necessary to cover all aspects of ESG.

c) Re-thinking and Upskilling: A mindset change coupled with ensuring appropriate resources are made available or, if necessary, hiring and re-training to introduce, integrate and ingrain ESG practices into the FO's processes. This could be a dedicated function or involve a re-scoping of existing investment workflows, in either case often complemented by external advisers. The team then works to overlay the FO's asset management and philanthropic activities with ESG considerations, perhaps working alongside or under the purview of a sustainability committee. One must recognise that it is the cultural transformation that is crucial, and see ESG as a way of doing things and not as a means to an end.

d) Impact Assessment: The main challenge to impact investing has been in determining what "success" means. Returns must clearly go beyond financial performance. But setting clear expectations at the outset will avoid subsequent ambiguities and potential disagreements. We see working with knowledge partners and expert advisers as crucial to getting it right.

The Asian Venture Philanthropy Network (AVPN) published a very useful guide, Guide to Effective Impact Assessment, in May 2016. In it, the AVPN explored various frameworks and templates for impact assessment, the motivations for impact assessment and how impact assessment frameworks are set up. Key takeaways laid out in the guide include:

• Identifying the recipients of and motivation for the impact assessment reports. Are the recipients internal (eg senior management) or external (eg potential funders)? Is the assessment motivated by reporting needs, branding considerations, fundraising efforts or mainly for internal consumption, such as, performance and risk management?

• State clearly the social goals to be impacted, obtain data from all relevant stakeholders and ensure outcomes are measurable.

• Both qualitative and quantitative indicators contribute to conveying impact but a business's stage of development will influence the robustness of data collection. Paper data collection will give way to technology-based data collection means.

• Data collected needs to be interpreted appropriately.

• Depending on your motivations, existing templates for both standardised and customised indicators in the areas of due diligence, performance management and risk management are available. Examples of the former include the Impact Reporting and Investment Standards and the Global Reporting Initiative. Customised indicators fall into two main categories, quantitative or qualitative.

• Ensure that the results of your impact assessment complies with reporting guidelines and, wherever possible, is presented in the most suitable format for the audience. There are powerful examples of the branding and marketing value in how these reports are put together and presented.

Evaluating the portfolio on a regular basis will allow the family office to adjust and redefine their investment strategies and goals. As the WEF Report observed, "for the strategy to be sustainable, the family must be clear on return expectations as well as short-term and long-term capital needs".

Guided by family and generational values seeking not just economic but social returns, FOs can lead the way and play a catalytic role in showing the world where the "bridge between philanthropy and asset management" lies. Perhaps a pot of gold awaits all who cross that bridge. W