News | April 20, 2021

Tatler Experts’ Corner: I’m clashing with family over our investment strategy, I favour sustainable investing, whereas they want pure financial return. How can we agree?

As part of the Tatler SOS Experts’ Corner, Camilla Wallace delves into the subject of investing sustainably and ethically and shares her advice on how to reach a consensus with family members holding different attitudes to investing.

This is a common trend. The difference in investment objectives of the Baby Boomer and millennial generations was apparent before the outbreak of Covid-19, but the pandemic has only served to make these differences more pronounced and for many high-net-worth families, it will be a gap that will be difficult to bridge completely, but not impossible to improve.

Sustainable investing

The value of an investment is no longer just about returns. An increasing number of investors are also calling for their money to make a positive impact on society and the world at large. I refer to this approach very generally as ‘sustainable investing’ but in reality, there is no one agreed definition and there are multiple different strands of the same concept.

For example, ‘ESG’ investing which looks at a company’s environmental, social and governance practices; ‘socially responsible investing’ which involves actively removing or choosing investments based on specific ethical guidelines (such as avoiding companies engaged in firearms production); and ‘impact investing’ which looks to help a business or organisation complete a project or develop a program or do something positive to benefit society.

Investment firms have been offering sustainable investing options for some time now and this approach can be built into an investment portfolio in whole or in part. There are also boutique investment firms that make this sustainable approach to investing the heart of what they do.

Popularity amongst millennials

Sustainable, responsible and impact investing is becoming increasingly popular and grew at a more than 38 per cent between 2016 and 2018 according to the U.S. Forum for Sustainable and Responsible Investment. Family Offices are also picking up on the theme. According to The Global Family Office Campden Wealth Report 2019, one in three family offices now engage in sustainable investing, while 19 per cent of the average family office portfolio is now dedicated to sustainability (predicted to rise to 32 per cent within the next five years).

The desire to invest ethically is especially pronounced among millennials (and also Generation Z). Their increased awareness of social inequality and environmental sustainability is perhaps due to them growing up with greater access to news on digital devices and social media, and from travelling abroad during gap years or through working for a global business. Whatever the reason, and whilst there will always be exceptions, it is fair to say that the next generations are more likely to possess a sharpened moral conscience on these types of issues.

Impact of Covid-19

The Covid-19 pandemic is proving to be a catalyst for sustainable investing. The kinder mentality that the pandemic is fostering across society, embodied by an ‘in it together’ attitude, translates (in an investment context) to a desire to support the good that companies are doing for society. For millennials, in particular, their wealth is far more likely to be placed with these types of company.

Generational clash

There is a clear clash between the ‘Baby Boomer’ and millennial generations in terms of investment approach. Without being brought up with the influences outlined above, the ‘Boomer’ generation are more likely to take a traditional view of investing and look solely at financial return and profit. Within ultra-high-net-worth families, ‘Boomers’ are more likely to be the wealth holders – the trustees, directors and general custodians within the family wealth structures. As well as a clash in outlooks, there can also be a clash in duties.

Trustees have duties by law to invest carefully and always act in the best interests of beneficiaries. If a sustainable investment is unlikely to produce as good a financial return as a non-sustainable one, this could cause trustees a legal headache.

Bridging the gap

The gap between investing for profit and investing for ‘good’ will need to be bridged in some way over the next 20 years as wealth gradually transfers from the ‘Boomers’ to the next generations. The result could otherwise be relationship breakdown between family members, which (aside from being distressing) could lead to the fragmentation of wealth if the new wealth-holders take assets outside of the family wealth structures and lose it through bad management or through claims by third parties such as divorcing spouse.

How the gap is bridged in real terms depends on how the wealth is held and what stake the younger generation have in it at this stage. It might be held through family trusts (with the younger generations as beneficiaries but not managing or controlling decisions), multi-layer wealth structures (involving trusts and companies) where the younger generation could be strategically involved in decision-making in a controlled way, or through family investment companies (where again the younger generation could have some influence) – but regardless, the control shift will be more harmonious if agreement can be made at this stage on investment strategy and objectives.

Family meetings will be important here to achieve a collective buy-in across all generations of an agreed set of investment values and goals which could be formalised in a family investment charter or agreement. The younger generations will need to have their say during these meetings and their views taken into consideration and not just given lip-service.

To do this, they will need statistics, and these are available to demonstrate the financial positives of sustainable investing. For example, the Global Impact Investing Network report, GIIN Perspectives: Evidence on the Financial Performance of Impact Investments found that ‘impact investors that target market-rate returns can achieve them, depending on fund manager selection.’

For UK investors there are also often tax advantages to impact investments and this could be another tool in the millennials’ toolbox. For example, the Enterprise Investment Scheme which provides significant tax incentives for those investing in smaller, high risk, unlisted companies; businesses with positive social impacts will often be in this category. There is income tax relief available at 30 per cent of the cost of the shares in qualifying companies, up to an annual maximum of £1m invested. There are also capital gains tax benefits available in respect of the initial investment and on the sale of the shares.

What is clear is that sustainable investing is here to stay, and will only get more successful and more mainstream in future years. Whilst the generations might clash over its place in a family investment strategy now – the impact of the pandemic and the increasing prevalence of statistics highlighting the profitability of sustainable investing, ideally coupled with ‘Boomer’ buy-in through family meetings, should help bridge the gap over time.

This article was originally published on Tatler. Please see the article here.