Why performance needs to be more than just about financial return for family office investors

Matthew Braithwaite, Wedlake Bell

By Matt Braithwaite, Private Client Partner and Jack Martin, Private Client Solicitor, Wedlake Bell LLP –  Family offices are increasingly wanting to invest in stocks and funds that are both profitable and reflective of social values. The types of investing fulfil these aims: Environmental, social and governance (ESG); socially responsible (or ethical) investing (SRI); and impact investing. According to The Global Family Office Report 2020 over a third of family offices surveyed intended to allocate most of their portfolios in this way over the next five years.

This has in part been driven by the succession of wealth to the next generation and the resurgence of the value of social capital leading to increased scrutiny being placed on the purpose of private wealth within society.  The Covid-19 pandemic has proved a catalyst for this resurgence, with a greater focus on the good that companies are doing for society, and the wish to invest in such companies.

Entrepreneurs, owner managers and family-owned businesses may prefer to deal with family office investors, as Rosalyn Breedy observed in her article, Why direct investing into private equity is an attractive option for family office investors, notwithstanding the challenges, but those family offices without their own visible social and ethical credentials risk being regarded as 'second rate' investors according to a recent survey, thus hampering their plans to position themselves as a credible alternative to private equity investment.

ESG, SRI and impact investing is particularly popular among next gens, typically millennials and generation Z. Through being more travelled than their parents and 24/7 news and social media, millennials and gen Z have perhaps a heightened awareness of the social and environmental problems taking place across the world. According to a study of ultra-high net worth (UHNW) individuals by Campden Research "…millennials want to do good. Philanthropy and impact investing are conduits UHNW millennials utilise to achieve this."

Family offices have greater discretion and are independent in investment decisions compared to other asset owners that may be subject to regulation (i.e. pension funds, insurance companies) or that have mandated trusts which restrict decision making. Family offices are also guided by the standing of the family within the social and business communities within which they operate, and with a growing call for visibility, want to be seen to endorsing sustainable investments to increase their social capital.

Investing in a sustainable, ethical or impactful way cannot be treated as a 'tick box' exercise though. Family offices will often lack the in-house expertise or capability to make such investments without external help. It is also difficult to audit and measure ESG, and impact performance given the relative newness of the concepts. It is largely recognised as an area which requires a lot more development but it is apparent that the desire to invest in ESG and impact investments is unlikely to wait for tools to audit and measure impact to catch up.

Even armed with the desire and expertise, family offices need clear guidance as to what the parameters are of their ESG, SRI and impact investing. This needs to come from the family themselves. The exercise of sitting down as a family and agreeing a set of shared values can be a cathartic and act as a devise to bridge the generational divide. Armed with a set of agreed values the family office can seek to deploy these across the family's investments.

It is not only investment managers who are having to reposition portfolios to meet these requirements. Trustees of existing trusts within family office structures are increasingly finding that investing in a sustainable, ethical or impactful may be at the sacrifice of financial return, which is out of line with the traditional parameters within which they exercise their duties.  The use of private trust companies, within which cross generations of family members with a vested interests in the underlying assets can have a seat on the board alongside professional trustees, could provide a solution.  For new structures, the parameters of ESG, SRI and impact investing could be hardwired into the structuring from the outset.

Family offices should consider their approach to ESG, ethical and impact investing in the context of other factors which go beyond financial performance, including their tax and economic impact.  For family offices, this 'total impact' approach also requires the family members to conduct themselves in a way that embodies the values which the family office is striving to reflect, through their behaviours both on and offline.  Only if family offices align themselves to this approach will their impactful attributes serve to complement their other attributes to elevate their status as private equity investors.

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