Increased focus on ESG issues is driving change in investment strategies among family offices

It is estimated that over half of all family offices globally are invested in ESG initiatives and that very soon around 25% of their portfolios will be allocated to sustainable investments. Western European and APAC family offices lead the way ahead of US and Eastern European family offices, but the entire market is moving in the same direction, with interest increasing through a combination of heightened awareness of ESG issues, social pressure, a sense of responsibility and a desire to use private wealth to make a positive difference. Given the vast funds under the management of family offices and the flexibility of their investment mandates, which might allow over-allocation to ESG or even specific sub-sectors within ESG, this category of investors will have an increasingly prominent and important role to play in the development of sustainable investing.

As a younger, more aware, generation assumes responsibility for decision-making, family offices have the opportunity to include sustainability and societal impact in their investment analysis. Previous scepticism about the financial viability of such investments has given way to a positive outlook. Indeed, family offices, like all other businesses, are increasingly judged on their environmental and social credentials, and a favourable public perception can raise brand recognition, increase loyalty among customers and staff alike, and in turn boost financial performance.

Whilst clean energy and climate change unsurprisingly lead the way in terms of causes attracting the most investment, sustainable food and agriculture and waste management are also gaining more attention. Further, as family offices are becoming more sophisticated and familiar with the sector, their thoughts are moving increasing towards investing in the “S” (social) and “G” (governance) aspects of ESG, including accessible and innovative healthcare and education, social mobility, gender and diversity issues, income inequality, financial inclusion, human rights and labour standards, as well as responsible corporate governance, board composition, bribery and corruption and data privacy.

To achieve their goals, it is important that family offices develop, and adhere to, a clear strategy, which they then closely monitor.

Firstly, the family should reach consensus upon what its core values are, what it wants to achieve and what it wants its legacy to be. Once settled upon, this should be clearly articulated among the entire decision-making body and the wider family generally, who should be reminded of their agreed mission statement regularly to ensure everyone remains “on message”.

The family office should also set-up, and enshrine in its constitution, a clear, objective and robust decision-making process for its investments, which ensures that investment decisions are made by the right people, with appropriate knowledge and understanding, following suitably rigorous analysis, and having obtained appropriate specialist advice and information. This will foster a coherent and consistent investment strategy, which will also strike the right balance between achieving the requisite financial returns whilst maintaining focus on the family’s environmental and societal priorities.

Once invested, it is important that the performance of individual investments is measured against appropriate and consistent benchmarks and reported upon regularly. There is now a wide choice of consultants and other service providers offering ESG-related data management services, ESG evaluations and reporting. Regular specialist reporting allows family offices to monitor the progress of their investments against their financial and ESG objectives, identify where changes in approach could or should be made, ensure continued alignment with the family’s investment priorities, and share knowledge and analysis among stakeholders within the family office team.

Norton Rose Fulbright offers a broad team of ESG specialists and business lawyers across a multitude of jurisdictions who can assist family offices in devising appropriate investment strategies, governance structures and decision-making procedures to ensure that family offices can implement successfully, and monitor, their ESG strategies and achieve their sustainability goals.