£1trillion of assets is set to pass between generations over the next nine years¹ – but, according to research, 70% of family wealth is lost by the end of the second generation and up to 90% by the end of the third².
The main contributor to this is a lack of communication between families – writes Rory Whitmore, Senior Associate Investment Manager at Tilney Investment Management. Intergenerational transfers can be charged with emotion and highly stressful, creating a greater need for financial advice – to both reassure the donor and prepare the recipient. Nearly two thirds of Clients’ children do not take on their parent’s adviser², so engaging with the next generation now and initiating the conversation could ensure the family wealth continues to grow and help advisers maintain and expand their client base.
One solution to helping families engage could be to consider Ethical or Sustainable investing. In a survey carried out, 67% of millennials view their investments as a way to ‘express their social, political, or environmental values’ and over 50% consider the impact of their investment decisions on society as important³. This does not come as a huge surprise, with television programmes such as Blue Planet and the rise of environmental advocators such as David Attenborough and Greta Thunberg dominating the media in the past couple of years.
Ethical and Sustainable investing are not new, but the investment approaches and sector definitions have certainly evolved which can cause some confusion and consequently deter advisers and investors alike. At Tilney, we refer to this as the ‘green maze’ of acronyms and buzzwords, but they can be easily explained:
Ethical is the oldest form of investing in the sector and focuses on negative screening of ‘sin’ sectors. Subjective investor preferences and fund definitions of ‘ethical’ differ widely as a result.
Socially responsible investing (SRI) gained traction in the late 2000s. The funds tend to focus on ‘best in class’ investments via Corporate Social Responsibility reporting and positive screening. This style of investing tends to result in fund performance more aligned with mainstream benchmarks.
Sustainable and impact: this style of investing involves integrated Environmental Social and Governance (ESG) risk analysis, where a company’s actions are reviewed alongside their measurable environmental and social outcomes – ‘the triple bottom line’.
The United Nations’ 17 Sustainable Development Goals for 2030, which cover a wide range of issues such as the climate, environment and global poverty, sets a clear blueprint for how we achieve a better and more sustainable future for all. This provides business and consumers with a useful framework and a number of fund groups have been working hard to measure their investment impact relative to the UN’s goals.
The crucial point is that the approach to ethical and sustainable investing, which is chosen for each individual fund, works alongside the standard fund management techniques to form the overall investment strategy.
Screening – Arguably the most common and traditional process used by ethical and sustainable funds is screening, which can come in both positive and negative forms. Typically, a fund manager will take a benchmark such as the FTSE All-Share or MSCI World and screen out all the companies that are deemed unethical or unsustainable. The industries and companies that are screened out can vary, but most tend to be related to health (alcohol or tobacco), the environment (oil and gas or mining), and companies with poor employment practices.
Positive screening is when companies are included because they make a positive contribution to society or the environment, such as renewable energy. Many funds use both forms of screening when selecting companies.
Best in class – The best in class approach is when a fund selects a company that has better ESG policies than industry peers. For example, if the investment policies allow a fund manager to invest in the banking sector or the oil and gas sector, the fund manager would be expected to select the oil and gas company with the best environmental record or the bank with the best ethical policies. This is very much a case of weighing up the pros and cons of each company and its individual corporate responsibility.
Ultimately, employing the research expertise to navigate through the ‘green maze’ is key. There are a number of funds proclaiming to be ethical or sustainable in their marketing material, but when you lift the bonnet, it becomes apparent they are doing something quite different. This is a growing problem known as ‘greenwashing’ and an issue the Financial Conduct Authority are trying to clamp down.
One misconception of investing in this sector is that it’s a trade-off between value and ‘values’, that you have to compromise investment returns to align your investment morals. Whilst past performance is not an indication of future performance, many sustainable funds have kept up if not outperformed their standard equivalent over the last few years. What has also developed in recent years is the ability to build a sustainable portfolio for a client with the same sector and regional diversification as you would afford a standard mandate. This has previously been a challenge with a limited ESG investment universe available within certain asset classes.
The themes of sustainability are now mainstream. As consumers, how we think and how we act all point in this direction of travel. There is $17.5 trillion° invested in the ESG market currently and as resources continue to become scarce and more companies consider the impact of their daily operations, then this sector will only continue to grow.
The value of an investment may go down as well as up, and you may get back less than you originally invested.
1 Cebr and Kings Trust Court, 10 May 2017
2 The great wealth transfer is coming, putting advisers at risk, Liz Skinner, 13 July 2015
3 US Trust insights on wealth and worth, 2014 Harvard Business Review
° Global Sustainable Investment Alliance’s Review 2018