World’s rich channel more wealth into tackling climate change

Financial Times


14/06/2024 - 14:43

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Family offices are making bigger investments into renewable energy, such as wind and solar power.

World's rich channel more wealth into tackling climate change

The world’s richest families are increasingly channelling their wealth into combating climate change, by allocating trillions of dollars to sustainable investments, according to industry advisers and asset managers.

Globally, nearly half of family offices — which handle the personal wealth of the ultra-rich — are investing in sustainability, says Rebecca Gooch, head of insights at Deloitte Private, a division of the Big Four accountancy group.

“Climate change is such a large-scale issue that many sustainable investors recognise it cannot be effectively addressed by governments alone and requires the mobilisation of private wealth,” she explains.

“It means many family offices, with trillions of dollars in their coffers, are seeking to offset CO₂ emissions. Wind and solar are deemed the most attractive investments followed by geothermal, wave and hydrogen.”

The sustainability sector is evolving rapidly with $30.3tn held in sustainable assets around the world, according to research by the Global Sustainable Investment Alliance.

Clean energy companies’ share prices have also recovered in the past month after a poor start to the year due to high interest rates and worries about climate sceptic Donald Trump winning the US presidential election later this year. Some fear that should the former president return to the White House he would axe the subsidies and tax breaks for clean energy introduced by incumbent Joe Biden’s Inflation Reduction Act.

Since May 10, however, the S&P Global Clean Energy Index, which tracks 100 companies globally — including wind turbine and solar panel makers — has outperformed the wider S&P Global BMI Energy Sector Index, which includes Shell and TotalEnergies, by 12 percentage points.

Environmental, social and governance (ESG) equity funds also experienced inflows in May — for the first time in six months, according to research by Barclays. They recorded $1.5bn of net inflows during the month, although they have suffered $38bn in net withdrawals since the start of the year.

Research by UBS of 320 family offices, controlling assets of more than $600bn, found that the ultra-rich are increasingly taking sustainability into consideration when assessing the long-term outlook of their operating businesses.

More than half (57 per cent) of the 246 respondents that had operating businesses said sustainability was a factor in decisions, according to the UBS Global Family Office Report for 2024 published in May.

“There was a real ramp up in terms of sustainable investments pre-Covid, then it lost a bit of steam and it is now re-emerging again,” says Benjamin Cavalli, head of global wealth management strategic clients at UBS. “Today, many families consider sustainability as a key factor for both their investment portfolios and business operations.”

Another report on family offices by Deloitte Private, also published in May, found that 46 per cent of family offices worldwide currently engage in sustainable investing — up from 42 per cent in 2021.

This report, which surveyed 354 family offices globally between September and December 2023, found Europe was leading the way on sustainable investing with 57 per cent of family offices now engaged in the sector (up from 45 per cent in 2021) followed by Asia Pacific with 52 per cent.

By contrast though, family offices in North America have been scaling back, with 26 per cent engaging in sustainable investing, down from 34 per cent in 2021.

This may be because North American family offices are more likely to believe sustainable investments produce lower returns than traditional alternatives. Forty three per cent in the region who do not engage in sustainable investing back this view, against just 16 per cent in Europe and 17 per cent in Asia Pacific.

However, many wealth and asset managers stress that backing climate change and sustainability has become a mainstream investment strategy — and ESG funds match the returns of traditional counterparts.

“Everyone is more aware about climate change being a key global risk — on a long-term basis, it is probably one of the main risks for investors,” says John Roe, head of multi-asset funds at Legal & General Investment Management.

LGIM has, in recent years, launched a number of ESG funds within its Future World range, and they have proved popular with defined contribution pension schemes.

Other asset management groups, such as M&G Investments, have also stepped up in the sustainable space. The UK fund manager has launched a series of initiatives, including a £30mn investment in March in UK sustainable housebuilder Greencore, which aims to build 10,000 low carbon homes.

“Clients want different things; they will have their own different goals,” says Jim Leaviss, chief investment officer of public fixed income at M&G Investments. “Some will want funds or investments which exclude coal companies, for example. We have a team who will look at ESG elements and a team who will look at how ESG influences the credit decision.”

Even so, the sustainability sector now faces challenges. Companies and funds can make false or misleading statements about the environmental benefits of their products, warns Deloitte’s Gooch. It means the industry needs enhanced tools to evaluate the impact of investments on social and environmental issues.

However, she stresses that the trend towards more sustainable products is likely to grow as a new generation of wealthy individuals take control of their families’ investments.

Gooch says: “The global transition of wealth may lead to a significant hike in investment towards sustainability, a rise in the number and nature of products available . . . and a rise in the number of professionals with relevant skillsets.”

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