- Private investors, worth $42 trillion worldwide, could be agents of change on ESG issues.
- High net-worth family wealth supports the long-term engagement ESG investment will require.
- Transparency, choice and trust are needed to unlock the power of private investors in shaping sustainability.
As investors worldwide demand greater transparency and alignment of companies’ strategies with ESG policies, private investors have an increasingly important role to play in ensuring their investments are held to the same standards. Historically, agitating for change has largely been the preserve of large institutional investors, but it is now in the hands of private ones to become key influencers in a multistakeholder response to solving pressing ESG challenges.
According to the Boston Consulting Group, the world’s institutional asset base totalled $61 trillion in 2020. Yet private individuals represented a similar asset pool, totalling almost $42 trillion. It is this community who as capital owners could have a say in corporate decision-making and thereby enact the change they want to see. Political and business leaders are very vocal about the need to arrest global warming and keep the world on a 1.5C pathway – but often with opaque plans on how to get there.
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If we want to move from talk to action, everybody has a contribution to make. Investors, for example, could simply sell the shares of polluting companies. But alternatively, they could exercise their votes or even engage directly and indirectly with a company’s management to push for responsible action. Research on the "exit vs. voice" theory states that the latter, the exercise of shareholders’ voice, is more powerful in addressing externalities that impact a company’s ESG stance than investors simply divesting their stakes.
High net-worth wealth, and especially family wealth, is ideally suited to the kind of approach that ESG investment requires. This group has large pools of capital and multigenerational objectives that support a long-term strategy. They have greater discretion in investment decisions compared to institutions that may be subject to commercial pressures or policies, or that have mandated trusts limiting their decision-making. Wealthy individuals and family offices can be flexible in how they approach investments in terms of size, geographies and asset classes in a way that the average institutional investor may not. They are in a privileged and unique position to leverage private capital to help scale the ESG sector, supporting long-term societal goals and ambitions. And, from our survey of over 500 industry practitioners working with wealthy families, we know they actually care: According to our Family Barometer, the topic that has most grown in importance over the past five years is sustainable, ESG and impact investing.
Wealthy individuals are much more than just investors: They are executives or entrepreneurs themselves, with great decision-making powers, who affect the products we will consume tomorrow, the companies that produce them, their employees and families and the societies in which they operate. What’s more, these individuals have a powerful impact as conscious consumers. They are citizens and voters, as well as parents or role models, passing on values to the next generation. So what does it take for the wealth management industry to unlock its clients’ power? The answer lies in a dialogue built on transparency, choice and trust.
The first pillar, transparency, is about understanding our world and the impact we and our clients have on it, by making problems and solutions tangible and measurable. While this may be easier said than done, giving up just because it is hard is wrong: Financial institutions need to use all the data available to them today to report and discuss ESG issues with their clients. Only this will start a virtuous circle of education, dialogue and improvement, helping the availability and quality of data, ultimately leading to the emergence of unified standards and taxonomies. Transparency is also the first step to mapping externalities to market prices, a key to achieving better resource allocation.
Once transparency has been provided, private investors need to be given choice. They need the right solutions to express their opinions, convictions and values in an impactful way. Over the past 15 years, the range of “responsible wealth management” products available has evolved hugely, creating more choice than ever before. However, this may have led to even more complexity and confusion. We are still a long way from clearly defined and universally accepted standards.
And finally, when speaking about choice, private investors should be enabled to express their views not just through the allocation of their capital (“exit”), but also by actively voting on a company’s ESG strategy (“voice”): While individual investors in 2020 owned 29% of shares in the US, it is known that they only voted on a fraction of them. With the development of simpler processes also for the ubiquitous exchange-traded funds, the remaining question for private investors is regarding the substance of their vote: Are they sufficiently familiar with a company’s board, and with the implications of its decisions on the environment and society? Here is a natural task for the wealth management industry: to facilitate the participation of its clients in shareholder democracy, operationally and, more than anything, as knowledgeable advisors.
Financing Sustainable Development
The world’s economies are already absorbing the costs of climate change and a “business as usual” approach that is obsolete. Both scientific evidence and the dislocation of people are highlighting the urgent need to create a sustainable, inclusive and climate-resilient future.
This will require no less than a transformation of our current economic model into one that generates long-term value by balancing natural, social, human and financial conditions. Cooperation between different stakeholders will be vital to developing the innovative strategies, partnerships and markets that will drive this transformation and allow us to raise the trillions of dollars in investments that are needed.
To tackle these challenges, Financing Sustainable Development is one of the four focus areas at the World Economic Forum's 2019 Sustainable Development Impact summit. A range of sessions will spotlight the innovative financial models, pioneering solutions and scalable best practices that can mobilize capital for the the world's sustainable development goals. It will focus on the conditions that both public and private institutions should create to enable large-scale financing of sustainable development. It will also explore the role that governments, corporations, investors, philanthropists and consumers could play to deliver new ways of financing sustainable development.
All of the above is reflective of the traditional role of wealth managers as experts, founded on a model that requires them to think for their clients – providing data in a world of asymmetric information, making recommendations, selecting products and managing portfolios. This has its merits, but to build lasting trust – the third pillar in the effort to unlock the power of private clients – our efforts need to go a step further. We will need to become facilitators who connect clients and enable them to co-create. It will mean designing solutions with clients rather than just for them; making clients, and us, part of a larger network of politics, regulation, industry and society. It will mean expanding the definition of wealth management beyond the purely financial to one that connects and collaborates. To make a material difference and usher in positive change, it is the best route we have.