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‘Great wealth transfer’ set to accelerate ESG transition in the wealth management sector

‘Great wealth transfer’ set to accelerate ESG transition in the wealth management sector 1

By Stuart Parkinson, Group CEO, Lombard International Group

‘Great wealth transfer’ set to accelerate ESG transition in the wealth management sector 2

Stuart Parkinson, Group CEO, Lombard International Group

While institutional investors continue to increase their commitment to ESG and the UN’s Sustainable Development Goals, it is the shift among (ultra) high-net-worth (UHNW/HNW) individuals and families that is emerging as one of the key drivers of this increased focus. Crucially, societal groups that are well attuned to the broader social and environmental impact of their investment such as women and Millennials are important catalysts in driving this shift. This is challenging the wealth management sector to pay greater attention to the development of products and solutions that appropriately meet their expectations and requirements.

The opportunity is vast. In the coming decades, some £5.5trn is expected to transfer to Millennials and Generation Z, handing them the responsibility to meet their financial goals while also safeguarding the planet for future generations. All the signs are that they are ready and eager to seize that opportunity. About one-third of Millennials often or exclusively use investments that take ESG factors into account, and Morgan Stanley’s Institute for Sustainable Investing found that 86% of Millennial investors are interested in sustainable investing or investing in companies or funds that aim to generate market-rate financial returns, while pursuing positive social and/or environmental impact.

ESG is the investment related topic that has grown most in importance over the last five years, according to Julius Baer’s second annual survey of UHNWI advisers. This trend is also reflected in the market and last year was a record year for ESG, with an estimated $120 billion channelled in sustainable investments, more than doubling the $51 billion invested in 2020. But hesitancy around returns, greenwashing, and a lack of product standardisation is a hindrance. And as sustainable investing becomes more mainstream, sophisticated client demands will continue to become more complex, meaning that the capability to measure ESG impact is crucial.

The direction of travel is clear, and companies must take tangible action in this space if they hope to remain relevant to their future clients and stakeholders. Net zero targets are looming closer, and leaders within financial services and beyond are tasked with marrying growth with sustainability, however the solutions remain complex. The core truth is that being able to successfully manage both the internal and external sustainability challenges will be key to a business’s success going forward. Those who do not, simply risk falling behind their competitors.

Being an honest advocate for sustainability

Businesses must go further on their ESG targets, and we are seeing them increasingly being held to account by investors who see ESG as a business priority rather than an add-on. But tackling the internal issue of sustainability is more complex than many want to admit. Most companies are ESG aware and have picked the low hanging fruit. But what’s next? ESG is about more than just cutting back on air miles, putting beehives on the roof and limiting single-use plastics in kitchens. It also includes how a business works and operates on a global scale, how it governs and how it impacts communities, which is much more difficult to agree, implement and quantify.

For now, asset managers appear to be taking an activist ‘engage first, divest later’ approach. Businesses are increasingly being challenged to develop and implement a holistic ESG approach, one that outlines not only a clear willingness from companies to improve their ESG stance, but also a destination and a robust roadmap. This growing requirement means that companies are increasingly aware of the impact that a lack of adherence can and will have on reputation, and ultimately on profits and share price.

Whilst regulation is still building, with a final European taxonomy yet to be formally approved, there is a clear lack of a single vision and strategy, and businesses must accurately assess the landscape, i.e., truly understanding that the climate and social impact of business decisions is incredibly complex, nuanced, and sometimes intangible. 

While there is pressure to create value for their many stakeholders, as well as high expectations from communities and society at large, C-Suite and CEOs, in particular, need to recognise that the answer may not lie with them or their experience. Crucially, however, leaders still need to set the tone and purpose from the top and be genuine advocates for sustainability within their businesses. 

The fiduciary duty of Wealth Assurance

Looking externally, Wealth Assurance is the gateway through which an increasing number of (U)HNWIs and their advisers are choosing to activate their ESG investing strategies. The modus operandi of financial services companies is shifting and the focus for investors is no longer  solely financially positive results. To navigate those new challenges, more than ever, companies need to have a clear authentic purpose and stick to it. They need to create value for their stakeholders, but they also need to be valued by them. While creating long-term value for shareholders is certainly critical, enabling (U)HNWs to actively shape a sustainable future by developing relevant and flexible investment vehicles is also imperative. 

The factors underpinning a robust ESG strategy, such as continued commitment to digitalisation, service excellence, a strong governance framework, and ethical business conduct, are also required to maintain profitable and sustainable business growth. This is where today’s (U)HNW interests can align with the (U)HNWs of the future. With access to large amounts of capital, private investors are estimated to be worth $42 trillion globally. They could be major drivers of change and (U)HNWs are in a unique position to help scale the ESG mission and support long-term societal goals and ambitions by leveraging private capital. Navigating this transition successfully requires a great deal of transparency, choice, and trust. 

Conclusion

As I navigate and lead our business through the external and internal challenges and opportunities around sustainability, I have learnt a great deal about the sustainability challenge and the steps needed to meaningfully address it. As advisers seek to anticipate and accommodate their client’s attitudinal and expectation shifts, being able to answer these concerns is paramount.

Providers must have the confidence and knowledge to have an open and active dialogue with their clients’ trusted advisors and asset managers on the topic. By providing them with robust and agile wealth and succession planning solutions that allow the creation of efficient diversified investment portfolios, with relevant ESG-related criteria clearly defined, measured and reported, they can approach the future with confidence. 

We are in the midst of a generational and societal shift which I believe provides great opportunity. We have the privilege to take action and help design the more sustainable model we want for tomorrow. Wealth Assurance will certainly be a relevant and powerful enabler of this change.

[1] Are advisers ready for the intergenerational wealth transfer? - FTAdviser.com
[2] Millennials spurred growth in sustainable investing for years. Now, all generations are interested in ESG options - CNBC
[3] How Younger Investors Could Reshape The World – Morgan Stanley
[4]https://www.wealthbriefing.com/html/article.php?id=192843&mc_cid=96f914a36c&mc_eid=ebf70d311b#.YgT2bJbP02x
[5] https://www.bloomberg.com/news/newsletters/2021-12-01/the-esg-market-is-controlled-by-a-few-big-investors
[6] https://www.weforum.org/agenda/2022/01/private-investors-esg-investment

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