Responsible Investing: Making an Impact Beyond Philanthropy

Increasing numbers of family offices are using the power of their investments to drive change.

Heading into 2020, family offices saw a 50% increase in responsible investing assets over the prior two years, as families began to view such strategies as a way to align investments with their values and make an impact beyond traditional philanthropy.1 That trend has only gotten stronger since the COVID-19 crisis, with a growing number of family offices exploring environmental, social and governance (ESG) and other responsible investing strategies and advice.

“The pandemic has catalyzed action in a way that has been unlike any prior event, with more wealthy investors realizing that the dollars they invest can support meaningful change that’s aligned with their values,” says Sinead Colton Grant, Global Head of BNY Mellon Investor Solutions, BNY Mellon Wealth Management.

Interest from younger generations is also creating a groundswell of demand from family offices for responsible investing strategies and expert advice. In a 2021 study of more than 650 wealthy investors by The Harris Poll for BNY Mellon Wealth Management,2 53% of investors indicated a need for more advice on how their investments can make a positive environmental impact. Moreover, 56% felt that investing in companies likely to have a positive environmental impact is equally as important as a solid return. For those under 40 years old, the results rise to 90% and 92%, respectively.

“Families are always looking for ways to engage the next generation and keep them connected to the legacy of the family. One way is through responsible investing,” says Vincent Hayes, Head of Global Family Office & International Wealth Management at BNY Mellon Wealth Management. “Younger generations are driven to make an impact and give back to society overall, leading to more engagement with the family office and the sustainability of the family legacy."

Doing Good and Doing Well

Increased adoption of responsible investing by family offices is also due to the realization that aligning investments with personal values doesn’t have to come at the expense of performance. For example, the MSCI KLD 400 Social Index – a weighted index of 400 U.S. securities with outstanding ESG ratings – has outperformed the S&P 500 on an annualized basis for over 10 years, through to June 30, 2021.

“Responsible Investing solutions apply a more holistic lens on risk, extending beyond traditional metrics that appear on the balance sheet,” says Colton Grant. “One of the drivers of that long-term outperformance is the behavior of responsible investing funds during market downturns. In aggregate, when markets have experienced sharp corrections – as we saw in February and March of 2020 – many ESG integrated strategies had smaller drawdowns than the broader market. And as we know, reduced drawdowns are a key component of generating consistent, long-term outperformance.”

A study by the NYU Stern Center for Sustainable Business found a positive relationship between companies’ ESG activities and their financial performance.3 After analyzing data from over 1,000 academic research papers from 2015-2020, the authors found a positive relationship between ESG and financial performance in 58% of the papers which analyzed corporate performance metrics – like Return on Equity (ROE) or stock price – and a neutral impact for 13%. For investment-related studies, which typically focused on risk-adjusted attributes like alpha and Sharpe Ratios, 59% showed similar or better performance versus non-ESG investment approaches.

Responsible Investing Approaches 

There are several different approaches family offices can explore to integrate responsible investing into their portfolios:

table of responsible investing approaches

While screening strategies account for the largest amount of responsible investing assets, integrated ESG, impact, and thematic investing strategies are also experiencing significant inflows, with compound annual growth rates of 30%, 92% and 34%, respectively. 4

There are a few different ways family offices can integrate responsible investing into their overall portfolio construction:

  • Overlay: A family office assesses its goals and values alignment, and then overlays responsible investing across all the assets and investments within the portfolio.
  • Sleeve: A family office takes a sleeve of impact investments – essentially a sub-account that’s traded separately – and adds it to the overall portfolio.
  • Carveout: A portion of a family office’s portfolio can be carved out and used specifically for a separate, value-aligned portfolio.

The overlay method has traditionally been the most popular among family offices, but many are moving to the carveout option once they become more familiar with responsible investing.

Getting Started

Here are some initial steps family offices can take when they’re ready to commit to responsible investing:  

Align values and goals
First and foremost, families must communicate with each other to ensure their values are aligned for multi-generational wealth sustainability, and to identify the areas of responsible investing to support. These are often longer-term commitments, so families need to make sure all family members agree on the specific themes and investments they decide to embrace.

Network
It’s also important to increase awareness of the different types of responsible investing approaches and which solutions best align with areas of importance to the family. Networking with other family offices, or peers who have previously implemented responsible investing, can also provide valuable insights into best practices.

“It’s taking that first step and connecting to a peer community or with your advisors around different strategies,” says Hayes. “Those actions are a great start to getting an education around how responsible investing works and the initial steps necessary to create a portfolio that matches your values.”

Get expert advice
Finally, it’s important that family offices connect with advisors who understand the various responsible investing strategies and know how to develop a portfolio that’s best aligned with a family’s values and objectives.

“Sometimes when clients are in the initial stages of their journey in responsible investing, it can seem like an area that's difficult to approach, with specific and often confusing terminology,” says Colton Grant. “I would encourage investors contemplating those first steps to review the significant resources available to support them in that process, including the education that trusted advisors can provide. While later stages in the responsible investing journey may have greater investment dollars associated with them, the first step on an investor’s journey is the critical one.”

  • US Forum for Sustainable & Responsible Investment 2020 Report on US Sustainable and Impact Investing Trend.

    Survey was conducted online by The Harris Poll from March 1 – March 31, 2021. A total of 661 interviews were conducted among U.S. adults age 18 and older with investable assets of at least $5 million. All respondents (not only those who met the qualifying criteria) were weighted to ensure that relevant demographic characteristics of the sample matched those of the U.S. general population.

    3  ESG and Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015-2020, NYU Stern Center for Sustainable Business and Rockefeller Asset Management, February 2021.

    2018 Global Sustainable Investment Review.

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