Wealth managers go green to make an impact with next generation

High net worth individuals now, more than ever before, are seeking to align their personal values with their investments to make an impact. And while sustainable investing is no longer a novel term for investors or wealth institutions per se, clients’ accelerated drive towards sustainability is influencing the investment industry and crucially, changing how it is being regulated. 

Younger clients are particularly interested in this area, using both head and heart when making investment choices. Indeed, this age effect is so pronounced that a measure of how good a private bank is at offering impact investment opportunities can often be linked to how much it has targeted ‘next generation’ clients. 

The sentiment is clearly visible in BNP Paribas Wealth Management’s Global Entrepreneur Report 2018, which tracks this shift in mindset towards sustainable investing among the younger generation of business owners. More than 80 per cent of those under 35, for example, maintain some investments targeted at environmental or social outcomes compared to 45 per cent of over 55s. Younger entrepreneurs allocate a higher proportion of their overall investment portfolio (8 per cent) to sustainable investments than the over 55s (5 per cent).

A growing global social conscience also means this trend is only going to continue. This is once again most prominently anticipated among the next generation of clients, the majority of whom intend to increase their allocation to sustainable investments over the next couple of years. 

Gauging the social and environmental effects of any business however is much harder than measuring profit. As such, there is increasing demand for support from clients to demystify the terminology and guide them through the various investment options available. 

Some wealth managers are beginning to recognise this is an opportunity for differentiation and evolve their thinking. 

UBS is collaborating with partners outside the industry,  such as the World Bank and the World Economic Forum, to develop an independent, open architecture platform to facilitate sustainable investments. “We have big problems that were outlined by the UN sustainable development goals. There is a role for private capital in addressing these problems,” says James Gifford, senior impact investing strategist at UBS.

Last year, Credit Suisse set up an Impact Advisory and Finance department to drive its sustainability agenda and is planning to issue its first green bond alongside a framework for how the proceeds will be managed. 

The regulator too is stepping in to address the absence of official rules on what classifies as ‘green’, ‘impact’ or ‘ethical’. The European Commission, for example, is preparing new legislation to unify rules on investment classification to avoid ‘greenwashing’ – when an organisation spends more time and money claiming to be ‘green’ than actually implementing policies that minimise environmental impact. 

Meanwhile, in the UK a government review  noted that while the UK had been a pioneer in developing the concept of social impact, it has since made limited progress relative to other countries, and highlighted that supply is yet to catch up with demand. 

The report also suggested that while more than half (56 per cent) of UK individuals have at least a moderate interest in impact investment, less than a tenth (9 per cent) have actually invested. The correlation between those who behaved sustainably in their day-to-day life and also invested sustainably was lower in the UK than the global average and below France, Italy and the US. 

This suggests the professional UK wealth community needs to work more closely with the regulator, their global counterparts and their impact-focused clients to increase the range of products available to investors in this area. Perhaps the review was the much needed wake-up call for the  community, as earlier this year 18 asset managers committed to increase social impact investment by addressing the challenges identified in the report. 

The aim is to make the market more accessible by facilitating investment in impact products, improving deal flow and the ability to invest at scale, strengthening competence within the financial services industry, and developing better reporting around ‘non-financial outcomes’. 

Development of universal frameworks and robust classification systems will require time, so to maintain momentum the industry needs to continue its focus on creating credibility and demonstrating transparency. This should encourage both investment professionals and clients to more consciously consider the kind of investment strategies and outcomes they want to pursue. 

Denisa Pritzova  is an analyst and Hubert Brown a  manager  at  wealth management think-tank Scorpio Partnership