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Article initially published on International Adviser. Read the article here

With more HNWIs looking towards green investing, firms need to open ‘active dialogues’ with clients

The demographic of high and ultra-high net worth individuals (UHNWIs) is changing, writes Andreas Meier, chief investment officer at Lombard International Assurance. There are more young and diverse individuals in this wealth bracket than ever before. Combined with a growing awareness of climate change issues, this has led to a significantly higher interest in sustainable investing as wealth advisers seek to meet the needs of an emerging client generation that cares as much about investment returns as they do about the impact their portfolio has on the environment.

However, confusion around sustainable investment options remains high, driven by unclear communication on the topic. This means that advisers are missing out on an opportunity to capture the trust and attention of the next generation of wealthy individuals.

Global growth

Environmental, social and governance (ESG) factors are used to assess whether an investment can be classified as sustainable. In the US, Canada, Japan, New Zealand and Australia, ESG investing increased by 34% between 2016 and 2018, according to the Global Sustainable Investment Alliance.

In Europe, total assets committed to sustainable and responsible investment strategies grew by 11% to reach €12.3trn (£10.8trn, $13.8trn) over the same period. While this is still a relatively small portion of global investment, this type of growth should make any wealth adviser pay attention.

This growth has largely been driven by an increasing number of women and millennials entering the HNW and UHNW bracket. Both groups are more likely to align their investment portfolio with their personal ethics and interests.

According to Morgan Stanley, 84% of women expressed an interest in sustainable investing compared to 67% of men. EY has projected that the $30 trillion transfer in wealth to millennials will see ESG continue to take up a growing share of global investments.

Moreover, legislative and regulatory measures are increasingly being adopted internationally which are cementing ESGs importance in the wealth management industry. France’s Article 173, for example, already requires investors to report on how they account for ESG criteria in their investment policies.

Despite the inarguable importance of the role sustainable investing will play in our industry and more broadly in achieving the targets set by the Sustainable Development Goals, there is a reticence among HNWIs in integrating investments into their overall portfolios that match their personal ethos.

A survey by UBS found that only 12% of HNW investors in the US have any sustainable investments.

Causes

There are three major causes of this reticence:

  • Confusing terminology: The 2019 Asia Sustainable Investing Review found that although knowledge about sustainable investment is increasing, only one in three investors can correctly define it, and 72% of investors find the array of terminology confusing, according to research from UBS;

  • The belief that sustainable investments mean lower returns: In the past, sustainable investments have been viewed as a kind of philanthropy. This couldn’t be further from the truth: a recent Morningstar study of European funds shows that sustainable funds were more likely to be top performers, and that more than two thirds of sustainable funds beat the average in their category; and

  • The belief that sustainable investing is only about the environment: People have in the past tended to focus on the environmental and social aspects. However, it’s important to note that governance, which directly relates to the sustainability of the sector and impact on risk, is as much a part of ESG as directing investment to environmental or socially beneficial causes.
 

In fact, the governance of a company can play a more important role in the sustainability of an investment than environmental and social credentials, particularly in the shorter-term. In recent years, we have seen numerous examples of companies which have lost significant amounts of value or faced collapse as a result of bad governance.

On the contrary, companies such as Unilever have thrived as a result of good governance, increasing annual turnover by almost 30% between 2007 and 2017 to $53.7bn (£42.7bn, €48.7bn) by rooting its purpose in and recognising its growth as inextricably linked with sustainable practices.

As both the traditional and new faces of wealth become increasingly focused on sustainability, there is a pressing need for financial advisers to keep pace.

To provide the best counsel to clients, wealth managers will need to open active dialogues and effectively communicate the benefits and opportunities that ESG investing can offer their clients.

Andreas Meier - Chief Investment Officer Europe
Andreas Meier
Chief Investment Officer, Europe
Lombard International Assurance