Private bankers respond as clients go green

Growing awareness of critical macro issues, such as global warming, income inequality, and gender inequity, has driven considerable interest in sustainable investing, which allows alignment of personal values and aspirations in life with the way money is invested, better risk management and making a concrete difference to the world. 

The 17 sustainable development goals (SDGs) adopted by the United Nations in 2015 to end poverty, protect the planet and ensure prosperity, and the Paris climate accord, signed in 2016 by 195 nations to combat climate change, have also increased the mindfulness of the investment community.

The cost of implementing these agreements, however, are astronomical. Over the next decade, the UN estimates implementing the SDGs will cost between $50tn and $70tn,  while the Paris Climate Agreement will cost more than $12tn over 25 years. 

The funding gap is huge and can be bridged only by leveraging innovative finance mechanisms which can tap into more than $200tn in private capital invested in global financial markets and ensure capital is deployed towards development efforts.

“We believe private wealth has an important role in mobilising capital to reach these sustainable development goals,” says James Gifford, UBS Wealth Management’s head of impact investing, formerly leading the drafting of the UN principles for responsible investing for seven years until 2013.

Private banks are certainly aware of soaring client demand for sustainable and impact investing and are launching new product and service offerings in this space. Eighty per cent of chief investment officers who took part in PWM’s third annual Global Asset Tracker survey earlier this year, predict their clients’ portfolios allocation to sustainable investments will rise over the next three years. Together, the 42 private banks surveyed manage more than $10tn in client assets globally, of which sustainable investments represent a small percentage (see Fig 1). 

A client’s journey towards generating a positive impact in the world, the society and the environment, starts with ‘ethical’ investing, which involves screening out ‘sin stocks’ like tobacco, gambling or controversial weapons. More sophisticated approaches, fast becoming mainstream, involve positive screening, in public markets, for leaders in environmental, social and governance (ESG) practices, allowing managing risk better, while also seeking to outperform traditional investments. 

At the end of the spectrum sits ‘impact investing’, a term coined by the Rockefeller foundation in 2007, addressing investments made with intention of generating measurable, additional, social and/or environmental impact, alongside financial returns. 

Most impact investments are made in private equity and debt, as well as real assets, although liquid investment opportunities are growing across all asset classes.

While definitions in the space are rather fluid, research shows millennials are driving the growth. “Millennials, now the largest generation, have grown up in a digital age with a constant flow of easily accessible information and increased transparency, are more socially and environmentally conscious, and expect public and private organisations to act accordingly,” says Mr Gifford. 

Women also have greater affinity for sustainability in investment and business, and form a key client segment, inheriting a large proportion of capital in generational transition over coming decades, while their wealth is growing significantly faster than male wealth. 

Firms must be more sustainable to attract talent, keep customers and avoid scandals, as news stories about social injustices and bad practices quickly proliferate, thanks to social media, leaving “no space to hide for unethical companies”. 

In Switzerland, UBS recently launched the “industry’s first 100 per cent sustainable cross-asset portfolios for private clients”, ahead of a planned global roll-out.

The portfolios target market rates of return, coupled with positive social and environmental outcomes, including allocations to World Bank debt instruments, green bonds, ESG stocks and thematic strategies, focusing on companies with better disclosure and gender diversity. 

They also invest in a new shareholder engagement strategy on UN sustainable development goals launched in partnership with Hermes Investment Management, which aims at generating additional impact through public, rather than private equity. 

“Increasing connectivity and big data have made the world more transparent than before, making it easier to measure companies’ impact on the world,” says Mr Gifford. 

“This means investors are in a much stronger position to engage in positive and constructive dialogue with businesses to drive positive social, environmental and therefore financial outcomes.” 

Market rate returns

Private banks have realised that, to attract clients, they should focus on investments which do not entail sacrificing financial returns for social or environmental benefits.

 “If we are to really grow impact investing, larger institutions should focus on market-rate return strategies, which have much greater capacity to scale and address big issues,” says Mr Gifford.

Last autumn Credit Suisse, which in 2017 celebrated its 15-year anniversary in micro-finance and impact investing, created a dedicated department to advise all clients – be they private banking, institutional or corporate – during their journey towards impact, and harness all related activities at group level. 

“So much of what our clients do in sustainable investing starts in the ESG arena, where you can invest in listed equities and public debt, which are liquid instruments,” explains Marisa Drew, CEO of Impact Advisory and Finance department at Credit Suisse.

In the ‘pure’ impact space, while there are many investments which set out to generate concessionary financial returns, as well as doing good, Ms Drew is concentrating her team’s effort on investment opportunities aimed at generating equivalent risk adjusted returns to traditional investments, as well as impact.

 “I think it is really important at the outset that we prove to both our wealth clients and institutional investors that they can make a concrete impact without sacrificing returns,” she says. “If we don’t provide more large, tradeable investable impact opportunities, we are not going to attract institutional players which can unlock big capital to drive social and environmental advancement at scale.” 

Enthusing about a now closed impact private equity fund that Credit Suisse raised in Asia, Ms Drew explains the bank has created a series of tailored products, mainly in the private debt space, for high net worth investors.

“Wealthy clients can often provide more patient capital and are prepared to invest in illiquid opportunities that follow their passions, which could be the ocean, financial inclusion or education. As such, we have created a whole series of bespoke products along key themes which are largely taken up by our private banking clients.”

These comprise different versions of notes packaging student loans to help smart pupils from disadvantaged backgrounds get to the best schools, as well as a micro-finance notes, offering loans to micro-financing institutions. An affordable housing note is in the pipeline, with the bank also looking to create an investable opportunity to address marine conservation and plastic in the oceans, themes increasingly close to peoples’ hearts.

“I do not mind experimenting to create something that starts out small, and considers our clients’ passions and desires, but I have to know in my heart of hearts the product can grow in size over time or be replicated many times over, so our clients can put greater sums to work and we can make meaningful change,” says Ms Drew.

There is a very wide swathe of passions, and lots of projects which deserve funding, but it would be “highly inefficient” to focus on small investment opportunities for a global bank such as Credit Suisse, which should pursue goals which make a big impact, she argues. 

Offering impact investing is resource and time consuming for an institution, but is an investment in the bank’s future, helping retain clients and attract assets. “As a financial institution, we have a stewardship role to play in society, and the most powerful thing we can do is bring capital where it is needed most and bridge societal, economic and environmental gaps.”

Credit Suisse manages around SF23bn ($24bn) of assets invested according to sustainability criteria, ranging from ESG to impact investing products. 

Gender dynamics

A “big tent approach” to sustainable investing, ranging from ESG to purer impact strategies, is very client centric, says Jackie VanderBrug, managing director and investment strategist at US Trust, Bank of America Private Wealth Management. 

“Clients do not think about ESG, they often ask us ‘what is that ESQ stuff’… Acronyms are very confusing for the average client. What they want is to make sure their investments have impact,” says Ms VanderBrug.

Research conducted by the bank on HNW individuals highlights interesting gender dynamics with regards to motivations for impact investing. 

Women are 30 per cent more likely than men to invest for impact because “they feel strongly about supporting certain issues”, “it is the right thing to do as a responsible citizen” or “they want to make a positive impact in the world”. Men are 90 per cent more likely to be opportunistic, believing sustainable companies are less susceptible to business risk.

The key factor that would drive clients to either start investing, or invest more into impact strategies, is evidence of risk adjusted returns, says Ms VanderBrug. To facilitate this, Bank of America offers a set of multi-asset class impact portfolios and a full set of ‘gender strategies’. But clients are increasingly looking for sustainable solutions across asset classes. 

The bank has $15.2bn in ESG and impact investing, representing less than 10 per cent of client assets. “There is room for growth, and as a large financial institution, we have pretty significant capacity requirements for strategies,” says Ms VanderBrug. What is still missing in the market is a broader choice of ESG funds. 

“We are seeing significant improvement but there are still asset classes where it is very difficult for us to find a manager that has the scale, quality and track record we require,” she says.

Scope for innovation

The gap is particularly evident in emerging market public markets, in fixed income across all sectors, despite recent improvements, and value- oriented strategies. Also, while there are several ESG large cap equity strategies, there is scope for product development in the small cap area. ESG strategies are very time and resource intensive to run, because of lack of data available for companies, especially those outside the benchmark, particularly in emerging markets. 

 “That’s why while continuing to grow our product platform, we are being very selective,” says Anna Snider, managing director and head of due diligence for the Chief Investment Office within Global Wealth & Investment Management, a division of Bank of America. 

“Because we want to make sure there is no trade-off, at least in the public markets, between having positive impact or being able to integrate ESG considerations, and generating investment performance. We are really careful to select strategies that hold up to that philosophy,” she says, however acknowledging that “the innovation, the growth, number of products and sophistication of these products has been really improving at an amazing speed, even in the last five to six years.” 

Bank of America launched its first set of ESG products in 2013, although several existing products were already following some sort of environmentally and socially responsible approach. 

“Demand creates supply and supply allows for more demand and different types of demand. We spend a lot of our time creating awareness both for financial advisers and clients, about what exists today and what they can do now compared to a decade ago,” says Ms Snider.

But not all private banks experience strong client demand. JP Morgan private bank states that “client demand is light”, although it has “funds available seeking that type of investment advice”.

Other institutions argue that social returns attract private investors to impact investments.  “We see increased interest from wealthy private clients in impact investing, but it’s quite a long journey for it to become mainstream,” states Oyvin Furustol, head Investment Services Europe at LGT, the private banking and asset management group of the princely House of Liechtenstein.

 “While financial returns may be quite attractive over time due to limited liquidity of the underlying impact investments, it is often the social return aspect that attracts investors,” he says. The bank launched a bond for a social enterprise in the solar energy space, which proved popular, and is looking for new solutions in both the private equity and debt space. 

On the other hand, ESG investing focuses on public markets, is at a much more mature stage, its growth driven by institutional investors with private clients also showing interest. 

LGT recently developed a proprietary sustainability rating system, which assigns an ESG score to equities, bonds and funds held in client portfolios, providing information about the sustainable quality of investments and offering all clients an additional dimension to their investment decision. Even if they may not have ‘sustainability’ as part of their name or investment process, European high-grade bond funds, for instance, will typically have a very high ESG score, as most European countries have implemented governance criteria and have in place social and environmental policies. 

“Beyond specialised sustainable products that we offer, we want to provide transparency across the investable universe, helping clients assess how sustainable their existing portfolios are and how they can move towards a higher sustainability level,” says Katharina Sommerrock, group impact coordinator, LGT.

Growing appetite

At BNP Paribas Wealth Management, client assets invested in responsible investments, including long-standing thematic funds, have grown tenfold in the past six years to reach €10bn ($12.3bn), “demonstrating the growing appetite from our clients for these types of strategies”, says Sofia Merlo, co-CEO at BNP Paribas Wealth Management. 

Significant contribution to this growth was given by the “first sustainable multi-asset fund of funds in the eurozone”, launched in 2015 by BNP Paribas Fortis Private Banking in Belgium, in partnership with the King Baudouin Foundation, gathering €6bn since then. Managed by BNP Paribas Asset Management, while also investing in third party, the product offers clients “a 100 per cent sustainable portfolio which reflects the bank’s recommended asset allocation”.

A certain percentage of the fund’s assets, which comes out of the bank’s management fees, goes to the foundation’s Venture Philanthropy Fund. A similar product was recently launched in Italy, and is on the launch pad in France. In Asia, the bank has just introduced a sustainable equity discretionary portfolio mandate in Asia with a traditional ESG approach, recording “strong client interest”. 

This year, in partnership with Cambridge University, the French institution also launched an educational programme, attended by 30 international entrepreneurs from five countries, focused on developing leadership skills to generate positive impact in their business, while also creating networking opportunities. 

This initiative builds on the bank’s latest research findings emerging from the global entrepreneur report, which show almost 40 per cent of them consider ‘positive impact’ core to how they assess business performance, compared to 10 per cent two years ago. 

Also, 55 per cent commit a proportion of their wealth to achieve socially responsible outcomes, and 64 per cent of millennial entrepreneurs are already actively engaged in impact investing.

Accelerating development

Educating wealth advisers and private bankers around providing high quality impact investment products that meet clients’ needs is crucial to accelerate the development of impact investing, says Amit Bouri, CEO of Giin, the global impact investing network. 

While several private banks have developed impact investment solutions, many private bankers “stick to what they know best”, are not aware of such products or have the wrong perception that investing with impact will mean accepting a “huge compromise in returns,” reports Mr Bouri. 

However, when private bankers become convinced of the value of impact investing and present these opportunities to clients, they draw larger investments into such products than conventional strategies.

“It is a two-stage sales process. When you introduce a new product into a private banking platform, you have to convince clients, but first you have to convince their bankers.”

Designing tools and services that support incorporation of impact in routine analysis, allocation and deal making activity of investors is also key.

“We believe the market is moving towards a world in which investors will be making decisions along three dimensions: risk, return and impact, and we need to develop tools that help advisers, bankers and portfolio managers allocate capital in a way that integrates those three issues,” says Mr Bouri. “Technology will be critical in bridging that gap.” 

The trend towards disintermediation, as shown by growth of crowdfunding and digital investment platforms, means investors will demand transparency in their investments, including what effects they are having on social and environmental issues, and will want to have access to that data on an ongoing basis. 

Regulation, not a driver of impact investing so far, may also play an important role in its future development and driving capital into the market.

And while the three biggest areas for impact investments are private debt, private equity and real assets, liquid opportunities are increasingly available to anyone who wants to be an impact investor. For example, savers can also use savings accounts in green banks or community banks, where assets are being deployed to help address climate change or invested in low income communities. 

“Years ago, people talked about impact investment as an asset class, but now they realise it is a lens, as one can invest for impact across the entire portfolio, and across all asset classes,” explains Alison Fort, managing director Emea at Toniic, a San Francisco- headquartered non-profit founded by impact investors, HNWs, families and foundations.

“That’s been the evolution at Toniic, as it started in 2009 almost as an angel network with regards to impact investments, with early stage investing, collaborating on investing and supporting social entrepreneurs,” she says. “But it has moved to a portfolio approach, where investors commit to be as impactful as possible across their whole portfolio.”

Toniic’s report, T100, published in 2016, analyses and makes public more than 50 portfolios of members who have intentionally committed to moving 100 per cent of an investment portfolio to positive social and environmental impact, showing such impact portfolios can be constructed by different types of investors with different impact themes, to meet a wide range of liquidity preferences. 

Coming of age

As awareness and interest grow, there will be a greater diversification of products available to investors at all levels, predicts Giin’s Mr Bouri, more scale and track record and more ways of developing liquidity. 

“Impact investing is coming of age, but it is not yet a mature market, which means we are still building out the range of products and services needed to realise its full potential,” he says. 

“But that creates a very entrepreneurial opportunity: those firms interested in serving clients of the future have the chance to pivot quickly and develop products and services for impact investments, which can help them be an early mover and secure a leadership position.” 

Family offices

Family offices can play a critical role in the evolution of impact investing, believes Amit Bouri, CEO at GIIN. Historically, family offices have helped establish new ways of investing, he says, citing their ability to pioneer and professionalise venture capital investing decades ago, opening the space to larger scale investors. 

“One important key factor in favour of family offices is the strong and tight connection between the principal and the agent,” adds Mr Bouri. Whereas large institutions such as pension funds may be slower to grab investment opportunities, family offices tend to be able to steer their investment teams into investments relatively quickly, which means interest in impact investing is translated into action more quickly. 

“While there is a lot of interest, there is tremendous untapped potential among the family offices, and a huge opportunity to convert interest into action and impact,” he says. 

Multi-family offices are registering increased interest from their clients, but the size is still small. “We see a growing interest in impact investing among our clients, but there has been little investment made to date,” reports Richard Clarke-Jervoise, investment management partner at Stonehage Fleming, the biggest independent multi-family office in Emea, managing £10bn ($14bn) in client assets and with £35bn under advisory. “Investments remain small and a very small part of clients’ overall wealth.”

However, impact investing often plays a “disproportionately important role within families, acting as the cement between generations,” he states, and may lead the younger generation to take for the first time an active interest in how family wealth is invested, opening up other important discussions between generations.