Why ESG Will Become A Top Priority Among Wealthy Investors 1

Why ESG Will Become A Top Priority Among Wealthy Investors

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Environmental, Social and Governance (ESG) issues are fast becoming some of the most important issues faced by the world today.

For the first time in more than a decade, issues related to the environment have been identified as the top risks to the global economy today.  According to the latest Global Risks Report by the Global Economic Forum, “climate change is the stand-out long-term risk the world faces.”

“The report, which identifies the top threats facing our world by likelihood and extent of impact, names failure to mitigate and adapt to climate change as the key concern for the Forum’s network of business leaders, NGOs, academics and others. The group places it as the number one risk by impact and number two by likelihood over the next 10 years.”

It further added that issues related to global warming rank as among the top five risks in terms of likelihood over the coming decade. This is the first time one category has occupied all of the top slots since the report was launched in 2006.Among these issues related to global warming are: Extreme weather, Biodiversity loss, Climate action failure, Natural disasters and Human-made environmental disasters.

As such, it comes as no surprise that integration of ESG factors in major investment decisions is quickly becoming a business norm. Apparently, ESG investing is not just about doing the right thing. It’s also about doing well, financially.

It comes as no surprise that integration of ESG factors in major investment decisions is quickly becoming a business norm. Apparently, ESG investing is not just about doing the right thing. It’s also about doing well, financially.

“Clients’ attitudes towards ESG investing are becoming increasingly favourable. Encouraged by growing evidence of the correlation between robust ESG practices and strong corporate financial performance, more are expressing interest in incorporating ESG into their decision-making processes,” said Marc Lansonneur, Head of Managed Solutions, Balance Sheet Products and Investment Governance at DBS Wealth during the announcement of DBS’ adoption of MSCI ESG Ratings for its wealth management business.

Indeed, there is strong evidence that suggests wealth and responsibility go hand in hand. Generally, companies that rank well in their ESG efforts have better business practices that benefits all stakeholders, not just shareholders. They look after their social and environmental responsibilities and are therefore, not susceptible to have one-time events that can harm their reputation or the company’s bottom line. Issues such as fines, labour strikes, human rights abuse, environmental disaster, etc are nipped in the bud due to responsible practices and the management’s conscious decision to always do the right thing. In the long run, companies with good ESG practices tend to be less volatile and have lower tail risk, bring great value to their stock price.

High Net Worth Millennials Are Making ESG A Priority

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Wealthy investors are increasingly making investment decisions that are guided by ESG principles. This is particularly true among millennial investors seeking higher returns from products or services that are aligned with their ethical values. Already, millennials account for 50% of the workforce and set to make up nearly 75% by 2025 – surely making a significant impact in how wealth managers and private bankers design their products.

The impending intergenerational wealth transfer to ESG-conscious millennial investors is set to drive the sustainability agenda front and centre. In fact, a FactSet study found that “over 60% of millennials expect their wealth management firms to screen investments based on ESG factors.”

It further added that, “the impetus for socially responsible investing is set to grow. Almost 70% of investors surveyed intend to increase their allocation to ethical investments in the next five years. This trend is being driven by Generation X – those between 35 and 54 years of age. One quarter of investors in this age bracket anticipate a significant increase in the social credentials of their portfolio and a further 46% expect marginal increases. Millennials have taken this focus one step further. Ninety percent want to grow their allocations to responsible investments, with half of these investors planning a substantial redistribution.”

High Net Worth Individuals (HNWI) are demanding greater insight, not just in how the numbers will perform, but into where and how their wealth will be invested, making sure that it’s aligned with their values.

In a way, this is a wake-up call to wealth managers to come up with a more socially responsible investment strategy. With increased automation and sophisticated analytics, High Net Worth Individuals (HNWI) are demanding greater insight, not just in how the numbers will perform, but into where and how their wealth will be invested, making sure that it’s aligned with their values.

ESG Investing Trends in 2020

The sentiment is clear. HNW individuals believe ESG issues are important and a significant factor in their investment making decision process. Looking into 2020 and beyond, here are the top ESG trends to watch for:

Environment, above all else, will take precedence

The World Economic Forum confirms it – all five top global risks are now climate-change related. ‘Climate’ is by far the most-discussed topic at the recent World Economic Forum in Davos, Switzerland with personalities such as Greta Thunberg, a 17-year-old climate activist, making all the headlines.

But beyond the noise, the numbers are pretty dire. By 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world’s population could be living under water stressed conditions. Over 800 million people are at risk from the impacts of rising seas and storm surges. And climate Migration could reach 1 billion by 2050. As such, some of the world’s biggest companies are taking action. Reports from the Davos conference reveal that “Salesforce.com announced it would plant a trillion trees over the next 10 years, Bank of America said it achieved carbon neutrality earlier than expected and Starbucks committed to a 50% reduction in emissions.”

Climate change will present tremendous financial opportunities

There are a lot of indications that a climate threat could be turned into climate opportunity. According to Bank of America, the climate solutions market could almost double from US$1 trillion a year now to more than US$2 trillion a year by 2025. Renewables such as batteries, biofuels, efficiency and the circular economy would benefit longer-term while “moonshots” such as geoengineering, the scale-up of climate- controlled farming, carbon capture and mass afforestation could also emerge as part of the solution.

Corporate reporting will incorporate environmental, sustainability and governance risks

Moving forward, there will be an increasing number of companies that will incorporate environmental, sustainability and governance factors in their reports. More companies will disclose information following the Sustainability Accounting Standards Board (SASB) framework, which advises that any ESG information or data being disclosed should be financially material.

SASB provides a series of standards to reporting companies from all sectors, referencing the CDSB (Climate Disclosure Standards Board) Framework for environmental information and natural capital reporting as further guidance for certain environmental metrics, which advises that any ESG data disclosed should be financially material.

The SASB identifies financially material issues, which are the issues that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors.

Stakeholder activism will rise – and hold companies accountable

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By definition, a shareholder activist is a shareholder that uses an equity stake to influence a corporation’s behaviour by exercising their legal rights as partial owners. However, things are changing. As more companies become more ESG-focused, the stakeholders are gaining more influence to steer the conversation.

In 2020, stakeholders will ramp up their involvement and will become more actively engaged in ensuring that corporations are following through with their sustainability commitments. Some of the most vocal stakeholders, in fact, are employees who are holding corporate executives to account. For example, in early 2019, employees at Microsoft staged a protest over the company’s involvement in the development of weapons technology for the United Stated military. Similarly, in Sept 2019, employees from Amazon, Google, Facebook and Twitter, along with many others have participated in a global climate strike where they walked out of work to pressure companies to be more aggressive in its climate goals.

Moving forward we expect more stakeholders will be more sophisticated and even more vocal in their bid to push companies to “walk the talk” when it comes to their ESG commitments.

In 2020, stakeholders will ramp up their involvement and will become more actively engaged in ensuring that corporations are following through with their sustainability commitments.

>> To read more about this story and other exclusive features about private banking, download the latest issue of Global Private Banker Magazine HERE.

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