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Will Family Offices Lead ESG Investing in 2022 & Beyond?

Will Family Offices Lead ESG Investing in 2022

The climate crisis has upturned the direction of investments that organizations take up. There has been a sharp growth in the incorporation of climate transition factors into investment decisions amid public sector initiatives to achieve the objectives of the Paris Agreement and the Sustainable Development Goals (SDGs).

Parallelly, Family Offices have increased allocations to climate-friendly strategies in anticipation of both higher returns and sustainable development.

A survey conducted by Campden Research states that 70% of families, foundations, and individuals see the transition to a global net-zero emissions economy as “the greatest commercial opportunity of our age” and nearly one-third (30%) of global wealth holders are targeting investments that directly support a transition to a low carbon economy.

What does ESG stand for?

At the core of its foundation, ESG investment is all about bringing positive changes in the society by being a better investor. The change that it brings to the table is determined through:

“E” which encompasses carbon emissions and climate change,

“S” or social components which include gender and diversity issues, human rights, and labor standards

“G” or governance refers to the standards for how a company is run such as board composition, bribery and corruption restrictions, executive compensation, or lobbying.

The ESG factors directly impact business outlook and are scored accordingly by third-party, independent companies and research groups to determine the companies’ environmental and societal responsibility scale. Research states that the market for environmental, social, and governance investment will make up more than a third of the $140 trillion in global assets by 2025, according to Bloomberg Intelligence.

Additionally, the pandemic became a growth enabler for ESG investing. From a social perspective, companies had the responsibility to bring safety and welfare to people in tough times. Also, even from an environmental direction, Covid-19 agitated real conversations on climate change from top management leaders to work towards strategies that enable future, sprouting considerations for Family Office investors for the years following.

Family Offices turned the opportunity to shift investment from traditional wealth assets to non-traditional wealth assets with ESG-focused fund management. Asset allocation is divided among traditional and non-traditional asset classes to manage risk and stability. The environmental ‘E’ pillar score of ESG rating is being increasingly used to align investments with a low-carbon transition, and could, in principle, help unlock valuable forward-looking information on firms’ climate transition risks and opportunities.

Top Reasons for Spiked ESG Investment among Family Offices

Followed by the global pandemic, the reasons for spiked ESG interest among Family Offices can be reasoned as below:

Next-generation family members and their newly-embedded values are rooted in sustainability and circular economy. The pressure for impact-driven investment and the alignment of investment values to family businesses by the younger generation has resulted in the upward trend in ESG-focused funds for a Family Office.

Leaders have the potential to become top innovators and early adopters to assume a socially responsible future for a profit. The ability to capitalize on ESG funding earned top-line growth factors in terms of profitability, long-term financial success, and brand recognition.

Moreover, the advancement of technology, especially in terms of Artificial Intelligence and Machine Learning, enables optimal decision making. AI initiates pattern tracking and trends by smart devices to make factual decisions and tap into new models of businesses and opportunities that have never been uncovered before.

An increase in public awareness encircling ESG investment turned into fundamental drivers for companies which brought both brand credibility and loyalty along with fulfilling social and environmental responsibility. Public mentality grew in parallel with public sentiment for the support of green investing.

The reasons for the upturn may be plenty and the wealth holders already active in sustainable fund allocation expect it will soon ascend to significant numbers. Investors estimate 47% of their portfolios will be constituted in ESG investment and this estimate will rise to 54% by 2027. Either way, the upward curve of ESG investment as absorbed by the family offices is here to persist for 2022 and beyond.