David Dawkins speaks to Barclays and UBS on millennials, impact and sustainable investing as the wealth management world prepares for the next generation
I am a sustainable investing sceptic.
For a while now I’ve been perplexed: stuck. Why would you ever compromise the simple relationship between client, wealth, wealth manager and returns with the slightly vague and morally superior idea of ‘sustainability’?
Is it really in the best interests of the client you represent to introduce the idea that an investment has a value over and above (or even alongside) the return?
And what about millennials, the very people this new investing culture has rushed out to greet?
Lazy, entitled? ‘LOL’. ‘Hard to reach’ - WTF?
I’m just not convinced that the fundamentals of wealth management need to change or adapt to a generation that, in all likelihood, will end up becoming a lot more like their parents than we currently give them credit.
Jeff Djevdet @Flickr
Take the 11 richest millennials in the US - eight are self-made (Facebook, Airbnb, SnapChat and Outcome Health) only three have inherited their wealth (Anheuser-Busch InBev, Enterprise Products Partners and Walmart). Lazy? A lot of what’s said about millennials pangs of a sloppy consensus. Can we really rely on one set of rules for the entire next generation of wealth around the world?
Take this current #fallingstarschallenge craze ‘sweeping’ (at least according to BBC, the Guardian et al) China, Russia and the US. Young, rich Chinese millennials pretending to fall out of their Lamborghinis or private jets, then photographed having spilt their gaudy trinkets - watches, handbags, champagne flutes - around them on the floor. In short, how can wealth managers possibly prepare a service based on a single set of values for a generation known for the shape-shifting nature of their of their beliefs and behaviour?
The answer is sustainable investing. Investing to the values you hold - best understood as a good strategy for dealing with first world guilt, aimed at the increasing number of people out there who are both socially conscious, and rich enough to be so.
Described by the National Review as ‘Boomer liberalism’ the ‘strategy’ they claim is one ‘easily pitched’ if ‘returns stay the same’, but investors avoid - ‘inadvertently financing companies that do evil things.’
And the journey away from ‘evil things’ takes three distinct paths. Firstly avoiding investments that are (probably) not aligned with personal values - weapons manufacturing, porn, tobacco (the Church of England has done this for years). And secondly what’s described as ESG investing - looking at a companies’ performance in terms of environmental, social, and governance.
For example, as Helen McDonald - Director, UBS Wealth Management charities team UBS tells Spear’s, firms with positive values on the gender pay gap and C-level diversification will deliver better risk-adjusted returns as ‘more diverse thinking tends to lead to better decision making and better corporate performance’.
As such, there is now such a thing as a Gender ETF.
‘Impact investing’ is the third strand, where you are generally aiming to make a return - albeit a sub-market return but with a very explicit social and environmental impact.
I remain sceptical, but the grammar of how this all works is there. As such, the wealth management world is falling into line to prove me wrong.
A recent UBS report titled Return on Values, part of the Swiss giant's Investor Watch Global and UK insights programme surveyed more than 5,300 investors in 10 countries on sustainable investing and found that despite the confusion both uptake and returns are on the rise.
When asked about the idea that the pursuit of values comes at the expense of returns Nick Tucker - head of UK domestic at UBS Wealth Management told Spear’s that there is no such ‘sacrifice’.
‘One of the things slowing this down is the perception that there has to be a sacrifice to invest along these lines. One can make the case that it should give you superior terms - but let's not go there.’ He adds, ‘we believe that returns will be equal if not better from a risk-adjusted perspective. Purely because money is flowing toward companies deemed to be sustainable.’ UBS he adds consider this to be ‘a trend in its infancy.’
UBS’ charities chief Helen McDonald adds that despite all the recent noise - ‘investing to your values in some shape or form has actually been around for several hundred years,’ originating in the UK with the Quakers and other religious organisation who sought to link their beliefs to their investments. However, she expands, ‘what we've seen in recent years is a number of drivers - policy, social, financial - that have accelerated the adoption of sustainable investing as an idea. And the financial services industry has responded by creating more products and strategies that meet that demand.’
So how does this play out in the real world?
‘A family we came across sold their business for a significant amount of money’ Nick Tucker describes the business that created the wealth as ‘not massively environmentally friendly’. He adds, ‘the family put aside a certain amount of money for each of their five children. And all of those children wanted to invest in a manner that could make up for some of the environmental damage done by the underlying company from where the wealth was created.’
UBS tells Spear’s that as a response to ‘the older generation being influenced by the younger generation’ they are ‘the first’ wealth manager to create a discretionary portfolio - a fully asset allocated - portfolio that claims to be sustainably oriented.
McDonald adds, ‘we've talked to clients about it over the last 3-4 months - and most of our clients frankly are not millennials - but they say “oh - yes. My children will like that”. And ultimately this money is theirs. So they're being driven by the parents but influenced by the children. From our perspective as wealth managers we cannot afford to ignore the children of our clients. If a wealth manager cannot cater to the needs of both the parents and the next generation - then we're going to have a problem.’
Tried as best I have to find a dissenting voice from within the Spear’s family, my attempts to garner even a small smidge of shared scepticism were roundly rebuffed.
Research conducted by Atomik research for Rathbone Investment Management found, broadly speaking that the ‘sustainability’ factor spoke to millennials.
Built on a survey of 1,503 UK adults, more than a quarter (27 per cent) of millennials said they would take their investment out of a company if it faced allegations of misconduct even if it was achieving high returns, versus just 9 per cent of 55-64s. More relevant to Spear’s readers, high net worth millennial investors are even more ethically minded – two in five (41 per cent) would take their investment out of a company if it faced allegations of misconduct or unethical behaviour, even if it was achieving high returns.
Support comes from Damian Payiatakis, head of impact investing at Barclays, who tells Spear’s that, as expected, younger generations tend to be more naturally comfortable combining financial and societal ambitions when investing. However, although the kids make all the noise, ‘it’s the older generation with more investible wealth whose choices today will be significant in shaping the investment market and the world their children and grandchildren will live in.’
But why add ‘sustainable’ or ‘impact’ to a very simple term - investment. What’s the next product off the conveyor-belt of this thinking? When will we see a ‘woke’ ETF?
Apparently, the modifier - 'impact', 'sustainable' - is of little consequence. ‘Impact investments perform like every other investment’, Payiatakis adds, ‘Some achieve their targeted returns, some don’t, and some exceed their expectations. And a growing body of research shows that incorporating these considerations has, at least, no detrimental effect.’
So are we talking about treading water, or a timely culture shift - difficult, but necessary?
Barclay’s add that there is a greater risk for investors that continue to have their investments managed traditionally, i.e. without consideration of their impact, who will find out their wealth has contributed to damaging people and planet in a way they wouldn’t want to have happen. ‘Incorporating “impact” into our investment process is a fundamental shift in how we invest' Payiatakis adds, 'in the same way that recognising risk altered our practice of investing.’
Alas, the groundswell of popular thought is against me. Sustainable investing is of value, and here to stay. But every once in a while a report comes along that piques my interest.
In October this year the FT reported quite bluntly, ‘moral investments aren't outperforming’.
The FT cited BlackRock’s range of ESG-focused ETFs in the US and Europe that will enable investors 'to align their investments with their values and long-term financial objectives.'
Chief executive Larry Fink repeated the global company line - investors will be better off if they invest sustainably. He told the FT: ‘We are going to see evidence over the long term that sustainable investing is going to be at least equivalent to core investments. I believe personally it will be higher.’
Alas, according to the FT, new findings do not fully support this claim. Covering analysis by Renaissance Capital, the relationship between country-level ESG (environmental, social and governance) scores the ‘financial performance is weak at best and at worst, non-existent, at least historically.’
Renaissance Capital's Charles Robertson hit out: ‘We would love to think that investing in line with ESG principles would both feel good and show up in market pricing. Sadly, we find virtually zero correlation between sovereign bond pricing (using credit default swaps) and ESG scores (obviously after adjusting for per capita GDP) and not much in the equity markets either. Indeed, the best-performing DMs and EMs in 2018 have the worst ESG scores.’
Is sustainable investing 'the future'? Spear’s would love to hear your thoughts.
Picture credit - Jeff Djevdet @Flickr