It’s not about ESG. Directing capital anywhere can impact people and bring about a certain degree of sustainability… (+) Results.
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In recent years, the term ESG (environmental, social, and governance) investing has been at the center of both praise and controversy. While some regions (particularly Europe) have embraced this as an essential part of sustainable investing, others have resisted it, believing it unnecessary or politically charged. Masu.
However, there is a branding issue with ESG that may currently be causing further confusion. The conversation should not just focus on the term “ESG”, but what it really focuses on is the outcome of the investment, which may be positive or negative, intended or unintended. Regardless of what you call it, investing has real-world effects and investors need to pay attention.
Why should family offices be concerned?
This topic becomes even more important when it comes to family offices. Family offices are an important source of capital and are rapidly becoming a dominant force globally, both from an asset management and investment perspective. The industry is experiencing explosive growth, and the capital managed by these offices has more than doubled in the past five years. Deloitte’s Family Office Insights Report reveals that single family offices have grown by 31% since 2019, with capital under management expected to reach $5.4 trillion by 2030. This puts family offices in a better position than hedge funds in terms of capital under management.
According to the latest Camden Wealth North American Family Office Report, family offices are employing a variety of strategies to invest responsibly. The most common approach, used by 73% of family offices, is thematic investing, which focuses on themes tailored to the family’s specific interests. Additionally, 68% incorporate ESG principles into their investment selection process, evaluating companies based on environmental, social, and governance objectives. Exclusion-based screening, used by 45%, avoids industries deemed to have a negative impact on society and the environment, such as gambling and fossil fuels. Meanwhile, 41% of family offices use positive and negative screening to actively select or avoid investments based on specific ESG criteria.
Why ESG? Rather, why should you care about the outcome?
Every investment has a result. When investors direct capital to companies, projects, or causes, these decisions inevitably have positive, negative, or neutral impacts on society and the environment. Many of these outcomes are unplanned, unanticipated, and may even be unintended. ESG screening provides one (potentially flawed) framework for assessing these impacts, but it is not the only way. Regardless of terminology, today’s data allows investors to assess environmental and social outcomes more accurately than ever before.
Backlash against ESG often revolves around how it is framed, particularly in certain regions such as the United States. For example, critics argue that ESG is actually perpetuating what it was partially designed to prevent: greenwashing. This criticism, coupled with inconsistent assessments and lack of transparency, further muddies the waters.
However, the central idea behind ESG – that investors should consider more than just financial returns – is becoming increasingly accepted globally. Even without the “ESG” label, more investors and family offices are recognizing that assessing environmental and social risks is simply good business practice.
Challenges in the family office sector
Handling advanced investment screening data requires the right technology. Many family offices still rely on basic technologies such as email, Word documents, and Excel spreadsheets to manage complex portfolios. Research shows that only an estimated 25% of family offices have advanced digital tools in place beyond these rudimentary systems.
This technology gap not only slows down operations, but also exposes family offices to a variety of non-financial risks. One example is the complexity of incorporating external data on investments, making it difficult to assess the social or environmental impact of investments. Additionally, the sector’s opacity makes it difficult to track and address unintended consequences, complicating efforts to align capital allocation with broader ethical or sustainable goals.
Without the right tools and frameworks, family offices may be unable to optimize positive outcomes or avoid negative externalities, whether environmental, social or governance-related.
The future of family offices and responsible investing
As technology evolves and data becomes more accessible, family offices will face increasing pressure to consider the broader implications of their investments. Advanced technologies such as quantum computing and AI have the potential to revolutionize the way data is collected, used, and made available to assess both financial and non-financial risks. Family offices that adopt these innovations will be able to align their portfolios with long-term financial goals, while also considering ethical and sustainable impact.
The conversation needs to move beyond discussing the merits of “ESG” and focus on real-world investment outcomes. The question is not whether investors should adopt ESG principles in investment screening, but whether the portfolio is consistent with investors’ values and intentions. In this way, investors can direct their funds to address the challenges facing society.
