The Wealth Assurance sector must seize the opportunity to sit at the heart of ESG stewardship

This article was originally published on the July edition of Private Banker International magazine. You can view the original version here.

Awareness and interest in Environmental, Social, and Governance (ESG) investing and sustainable finance has grown substantially over recent years and the pandemic has brought into sharper focus the importance for HNWIs to use their wealth to create a sustainable legacy. Wealth and succession planning is not just about protecting and passing on wealth to the next generation: the discussion has evolved to encompass the notion of wealth itself, and how it can be activated as an impactful tool to achieve non-financial goals and aspirations.

But historic preconceptions around ESG investments’ low yields, the lack of a clear common framework, confusing terminologies, and varying reporting criteria are still hampering a wider and harmonised shift towards more sustainable portfolios. Whilst most asset managers started to pick up on ESG considerations a few years ago, this was mostly driven by regulation and growing pressure from institutional investors. The reality is that HNW and UHNW families are still only dipping their toes in the water. 

The 2020 BNP Paribas Global Entrepreneur Report revealed that 58% of high and ultra-high net-worth individuals believe sustainable investing requires a long-term sacrifice of returns, with more than a third (35%) expecting some (single-digit) long-term sacrifice and 23% assuming a significant (double-digit) difference in performance over five years [1]. As the ESG journey takes off, financial services providers have a responsibility to advocate for sustainable finance beyond just complying with regulation, in order to support their clients in unscrambling ESG, modelling their own values into a common ESG framework and building sustainable portfolios.       

From a trend to a normative investment framework: the regulatory response

The recent pandemic has been a wakeup call for many. J.P. Morgan polled investors from 50 global institutions, representing a total of $12.9 trillion in assets under management (AUM), on how they expected COVID-19 would impact the future of ESG investing. Nearly three quarters (71%) said it was “rather likely,” “likely,” or “very likely” that the occurrence of a low probability / high impact risk, such as COVID-19, would increase awareness and actions globally to tackle high impact / high probability risks such as those related to climate change and biodiversity losses.

More recently, number crunching by Bloomberg Intelligence predicts that Global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management. [2]

This increasing awareness and demand for ESG has led to those throughout the financial services industry pronouncing their credibility, expertise, and commitment to this forward-looking cause. The lack of a common framework clearly defining ESG criteria has however created an investor minefield, with widespread uncertainty about products and initiatives that claim to offer ESG investing capabilities.  As a result, regulations on ESG and sustainable finance continue to develop which can be daunting even for the most experienced money managers.  

But, policy and regulation are proving to play a huge part in the rise of ESG investing, with the publication of the UN Sustainable Development Goals in 2015 often credited as being the starting gun which focused global attention on the positive change that could and needed to be made by 2030.
Once the further steps of the Climate Action accords and the subsequent Paris Climate Agreement were set out, the EU Commission identified a need to develop clear thoughts around how a sustainable finance agenda could be successfully implemented. 

The answer is complex; a regulatory puzzle composing of Sustainable Finance Disclosure Regulation (SFDR), a Review of the Insurance Distribution Directive (IDD), and Taxonomy being only some parts of the equation in our sector. The EU commission recently made an important step forward in the implementation of an EU legal framework on sustainable finance and has agreed recommendations on EU Taxonomy the text of which is now being reviewed by the EU Parliament and Council. 

Once complete, the regulatory framework will transform sustainable finance and establish a clear roadmap and robust platform from which the industry can build and in which investors can have full confidence.

But while a robust and clear regulatory structure provides the right environment for ESG investing to blossom, the financial services industry and leaders within it must play their part in the cultivating process. 

Fostering an open and active dialogue

Sitting at the heart of the wealth management industry, the Wealth Assurance sector must play a central and active role in clearly defining, integrating, and using ESG criteria, to enable the creation of more sustainable investment portfolios for HNW and UHNW clients. Providers must have an open and active dialogue with their clients’ trusted advisors and asset managers to provide them with wealth and succession planning solutions that allow the creation of efficient diversified investment portfolios, which should have relevant ESG-related criteria clearly defined, measured and reported. This is pivotal in our core purpose to protect, preserve and pass on wealth across generations.

Institutional investors are leading the charge on ESG investing, and HNWIs, while intrigued and keen to do the right thing, are yet to fully commit and match the engagement and enthusiasm for financial sustainability. There remains a not insignificant amount of hesitancy around increasing portfolio exposure beyond 10%-20%. Growing long-term confidence among investors will require a more proactive approach from the industry as a whole. 

Empowering advisers to begin the conversation, rather than waiting for investors to proactively bring up the topic of investing is pivotal. But to do this they need the commitment from providers that the structures are available to enable a shift toward a more sustainable investing strategy while also retaining the many wealth and succession planning benefits of Wealth Assurance solutions.

By doing this successfully, we can ensure that advisers are able to embed a proactive and agile sustainable finance strategy at the heart of their advice. But more importantly, do our best to make sure that the potential of the financial services industry to deliver a more sustainable future for the world is fully explored.