Next-generation wealth holders highlight the S in ESG

Young investors look beyond net zero to ESG issues like poverty and exploitation. Wealth managers face a highly persuasive and determined generation

Wealthy investors of all ages are sharply focused on climate change and sustainability. But for the younger generation, social justice is also a growing priority – and actions must speak louder than words. 

Environmental, social and governance (ESG) issues are now central pillars for wealth managers and their clients, but motivations differ across the age spectrum. 

If building a sustainable planet for the grandchildren is an urgent priority among older people, then for the under-40s, progress to net zero is a given. 

Spurred on by the economic and health inequalities pinpointed by the coronavirus pandemic, many are looking beyond cars and plastics to global poverty, child labour and pervasive discrimination.

In their bid to reframe their families’ investments along such lines, they’re proving to be highly demanding clients.

“Younger people can be very impatient for change and while many portfolios have already been significantly cleansed as a direct result of their influence, the conversations we continue to have with them can become emotive,” says Leslie Gent, managing director and head of responsible investing at the private bank Coutts.

“While the debate around ESG inevitably starts off with them wanting to make particular exclusions from a portfolio, it’s our job to explain to all members of the family that if you limit your investable universe, there will be impacts on your returns.” 

A shift in emphasis

Aside from differences in approach between generations, there is also a notable gender split, with women – particularly younger ones – noticeably more vocal about social inequality than men.

Younger women are “far more prepared to open discussions on these tricky issues than their male counterparts and anecdotally at least, I would say they have a greater understanding of them,” says Alexandra Loydon, director for partner engagement and consultancy at wealth management house St James’s Place.

While under-40s in general tend to be better educated about social and governance elements than their parents, younger men are “probably more interested in returns”, Loydon adds. 

The social side of ESG has tended to attract less publicity and investment than the environmental segment. However, younger clients have a wide range of concerns, reaching far beyond the traditional ‘sin stocks’ linked to alcohol, gambling or the arms trade.

“They want to know more about the impact their investments will have on issues such as child labour, the marketing of tobacco to the third world, unethical work practices or the number of women in leadership roles. Whatever the topic, their questions can be direct,” says Loydon.

Greater transparency and disclosure about the potentially positive and negative impacts of their family’s capital is also taking centre stage. 

“Whether as an individual investor, entrepreneur or family member, this is about aligning their role with a purpose so that they can maximise the impact they can create,” says Andrew Lee, managing director and global head of sustainable and impact investing at UBS Global Wealth Management. 

Younger people can be very impatient for change… the conversations we have with them can become emotive

The future of fossil fuels frequently comes up in family meetings and for many next-generation investors, removing major carbon emitters from a portfolio is an obvious first step towards a low-carbon future.

For fund managers, however, divesting problem stock rather than engaging with the companies involved – all of which have crucial expertise to share – is a case of throwing the baby out with the bathwater.

“Coal is a no-go for us because there’s no place for it in a net-zero world, but when it comes to oil and gas, we have to avoid starving big players of cash,” says Gent. “If that happens, they will go into private hands and we will have no further influence over them.”

After 20-30 years of dialogue with the sector, change is starting to occur, “but it can’t necessarily be achieved in anything like the next 12 months,” Gent adds. “That’s something that younger clients don’t always want to hear.” 

Growing scrutiny

Younger, ‘dark green’ investors are committed to responsible investing and want as much as possible of their portfolio invested according to their personal values. Individual investments are coming under closer scrutiny from such investors, who will one day assume control of big family portfolios. The values of wealth management houses are also in their sights. 

“Greenwashing is a big problem in the industry and it requires us, as asset managers, to draw on the knowledge of many different disciplines so clients can receive the guidance they need to help make an informed choice,” says Gent. “If you’re going to hold other companies to account, you have to start with your own business. For us, this is about being transparent and offering detailed disclosures on our website for clients to examine.”

Faced with a barrage of ‘Paris-aligned’ investment opportunities and ‘responsible investing’ hubs from investment houses, would-be investors without a PhD in environmental science could be forgiven for being out of their depth.

This is why wealth managers who can sift through the claims and counterclaims of ESG investing are becoming ever more vital. That’s the view of Tim Fassam, director of government relations and policy at the Personal Investment Management and Financial Advice Association.

“Their ability to cut through complex jargon and give bespoke advice based on their client’s highly personal ethical approach – something which may have involved lengthy deliberation by the entire family – makes managers a vital conduit between different generations and a trusted adviser for all age groups.” 

Many of today’s wealthy investors are acutely aware of their highly privileged position. They are keen to use their money not simply to create a legacy but as an active force for good.

With a growing number of ESG opportunities now available to them, the age-old tussle between doing good for society and making money for the family may finally be losing its grip, Fassam says. “Investing for sustainability and investing for performance are no longer poles apart and that’s good news for all of us.”