In 1971, the German business professor Klaus Schwab brought leading executives from Western Europe to a small town in the Swiss Alps. Schwab asked these corporate leaders to consider the impact of their businesses on all of their stakeholders – not just customers and investors, but the societies within their sphere of influence. This ethos of responsibility would form the foundations of a new non-governmental organisation committed to economic and social betterment: the World Economic Forum.
There is a growing understanding that wealthy individuals can meet their financial goals while also safeguarding the planet for future generations
Since that first meeting in Davos almost five decades ago, the need for corporations, governments and society at large to take responsibility has only grown. The World Bank estimates that $4trn worth of investment is needed every year to achieve the UN’s Sustainable Development Goals (SDGs) by 2030. With current annual funding from multilateral organisations amounting to just $1trn, the continued contribution of the world’s wealthiest people is more crucial than ever.
The urgency of global issues has challenged high-net-worth individuals (HNWIs) to consider how they can leave a legacy greater than just financial security to the next generation. It is the responsibility of their advisors to support them in doing so.
The new face of wealth
Finally, the misconception that responsible investments don’t bring high returns is being broken down. There is a growing understanding that wealthy individuals can meet their financial goals while also safeguarding the planet for future generations. August 2019 data from Morningstar showed that 73 percent of funds in its environmental, social and governance (ESG) index outperformed equivalent non-ESG funds over the past three years. This has led to HNWIs increasingly deploying capital to responsible investment opportunities – funds that preserve and grow their financial assets, and build a sustainable future.
This has contributed to the soaring popularity of sustainable investing in recent years. According to research carried out by UBS, 34 percent of family offices globally are already engaged in sustainable investing, and a further 25 percent are engaged in impact investing. Of the latter, 62 percent are focused on fighting climate change. Further, a Standard Chartered Private Bank survey showed that 84 percent of HNWIs were open to shifting their funds from philanthropy to sustainable investing.
Another major driver of ESG integration is the shifting high-net-worth demographic, with more women and Millennials joining the group than ever before. These groups are highly attuned to the broader social and environmental impact their investments have.
For example, research by Morgan Stanley found that 86 percent of Millennials and 84 percent of women are interested in sustainable investing, compared with 67 percent of men. This has contributed to an influx of sustainable and impact-focused investment funds and strategies, and the number of options available in this space is only growing. After increasing just one percent in 2018, assets in this sector rose 15 percent to $52bn during the first half of 2019, according to research by Fitch Ratings.
Although interest in sustainability from HNWIs is driving the investment management industry to assess how it can meet financial goals and address global issues, the urgency of the situation requires more rapid action. Currently, three quarters of wealthy individuals knowingly hold shares in companies that are not aligned with their ethics.
This disconnect highlights the increasingly important role advisors play in mobilising the high-net-worth community to pursue sustainable investment opportunities. The first step in achieving this is improving communication and clarity around ESG funds. Advisors must explain the options that are available to their wealthy clients so as to capitalise on the growing interest in aligning investment portfolios with personal concerns.
The growing popularity of responsible investing presents an opportunity for advisors to fulfil their fiduciary duty to their clients by considering sustainable investments while understanding the unique nature of the footprint their clients wish to leave behind. Service providers must understand that wealthy individuals have a responsibility not just to their families, but also to their employees, the causes they support and the communities they live in.
The contribution of HNWIs is essential to achieving the UN’s SDGs and to creating a fairer, safer and healthier society for a sustainable future. Personal advisors must take the necessary steps to ensure that their clients’ financial and wider objectives are both met.