Sustainable Investment Under Scrutiny: Steering Through The Debate

Why ESG Will Become A Top Priority Among Wealthy Investors 1

Last week it was reported that Exxon Mobil will continue with a lawsuit they filed against activist investors that sought a vote around climate resolution, even after the two investors withdrew their initial proposal. One of the investors, Arjuna Capital, a B-Corp, invests on behalf of both private families and institutions with a view to align investments to their clients’ values.

Watching Exxon Mobil’s response that seemingly argued for pure financial shareholder value, going against its own shareholders in such a public manner, one wonders whether this would have happened just a few years ago, or whether this bold action against investors looking to accelerate a sustainability agenda is something that aligns with a current shift in perspective around sustainability in the United States.

Such legal action is taking place in a time that is being reflected in business media as a period of growing, politicised opposition to ESG (environmental, social, and governance) considerations from the political sector, plus declining interest from Wall Street investors.

Further evidence that there is a perception shift around sustainability and impact investing comes from the suggestion that Davos is being pulled to the right, that World Economic Forum leaders are allegedly responding to pressure from fossil fuel funding and moving away from a focus around stakeholder capitalism, climate change and diversity, with even the phrase ESG not appearing in this year’s program.

So what is driving this perspective shift, what should family offices make of it, and how, if at all, should they adapt?

For Every Action, A Reaction

Firstly, as family offices keep an eye on headlines related to a shift in impact and sustainability focus, it’s worthwhile taking into account Newton’s Third Law, which states that for every action in nature there is an equal and opposite reaction. Last year saw a flurry of lawsuits against government bodies and governments themselves, perhaps most notably the landmark ruling in Montana where a court found the state needs to consider climate damage when approving projects in order to ensure constituents their constitutional right to a healthy environment.

Many of these legal initiatives were led by disgruntled youth, and as the younger demographic within the next-generation become more vocal and begin to wield more influence, their mindset and approach to sustainability are going to have a significant effect on the perspective of governments as well as public and private corporations over the next decade and beyond.

Taking A Global Outlook

Perhaps the first step for family offices is to take a broader view, consider what’s happening around the world and not just in their own backyard. With the looming election at the end of the year, family offices in America could fixate on how the result may affect policies around climate concerns and sustainability, but the entire purpose of impact investing is to ensure a better future for the planet, not just one country. It makes sense to take a global outlook, and in doing so potentially discover opportunities in other regions to further their impact related endeavors.

Europe leads in terms of impact investment initiatives, with more funds and more impact investors than the United States, WealthTech offerings have started to incorporate impact measurement tools as standard and there’s an increasing number of impact oriented events aimed at family offices and other investors. Various other regions, including Singapore is specifically positioning themselves as a destination for family offices seeking to deploy capital towards impact related initiatives, alongside its technology investment focus and various tax incentives aimed at attracting global family office investment.

Understanding Cultural Differences

Another consideration is that part of the reason why sustainable & socially responsible investing has gained some traction in the United States, but not reached the same level of enthusiasm as in Europe, is due to cultural differences. Perhaps a generalization but business culture in America has seemed traditionally more market-driven in its approach, with a focus on individualism, entrepreneurship and innovation, whereas in European businesses it’s more common to include emphasis on collective well-being, social responsibility, and sustainable development.

These cultural differences shape the strategies and policies adopted by each region, and naturally affect the overall perspective around sustainability and impact investing. It’s not to say that this won’t change over time, and there is an argument that there will be a shift entirely the other way as the next-generation takes greater control, transforming the United States into the leading proponent for impact investing.

Different Regulatory Landscapes

Another factor that enhances differing perspectives is the amount of regulation. The EU has implemented notable frameworks to promote sustainable investing, including initiatives such as the Sustainable Finance Disclosure Regulation (SFDR) and the European Green Deal. In contrast, the United States lacks a comprehensive nationwide framework for sustainable investing, leading to varying practices and interpretations amongst financial institutions and the frequently raised point that without a unified measurement for sustainability and impact investing there just won’t be significant levels of commitment.

Geopolitics And Challenging Times

The last few years, with the economic uncertainty and heightened anxiety around geopolitical risk, coupled with escalating conflicts in Eastern Europe and the Middle East, have done little to increase investors appetites for risk. While the market for impact and sustainable investing has matured and ESG-related assets have grown elsewhere in the world, the opposite has happened in the United States where anxiety from global economic uncertainty has been a contributing factor to the decreasing allocation and slow down in mainstream adoption of this sector.

Where To From Here?

Family offices across the United States that are looking to contribute to the spectrum of sustainable and impact investing need not be discouraged, and if anything, can still look to numerous regional companies and advisors that offer excellence and innovation across the impact sector, as well as connect with the growing number of family office networks that will help them align to a broader perspective on impact and sustainability and even provide access to investment opportunities within this space both locally and abroad.

Additionally, the ongoing push for better corporate accountability and transparency means that regardless of how ESG factors are politicised or positioned externally, they are becoming increasingly inherent as due diligence considerations within the investment landscape, a normalization that could make it easier for companies to prioritize sustainability as part of their operations.

For family offices concerned with a shifting perspective around sustainability and impact investing based on the actions of prominent corporations and headlines that highlight this, it’s worth reflecting that there is likely equal movement in the opposite direction. Maintaining a focus to explore those opportunities, to maintain objectives around sustainability and impact, is set to get more accessible, more accurate in terms of measurability and ultimately, more valuable to both the family offices themselves and the future they’re looking to shape.

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