How to Evolve a Sustainable Mindset amongst Wealthy Private Clients and Family Offices

Sustainability and impact are key criteria in the global investment community these days, driven by worldwide trends and client demand. ESG-driven investing very tidily fits into these broad and dynamic trends. Hubbis held a Digital Dialogue event on February 10, at which a panel of experts opined on the importance of ESG and sustainability to their clients and families in the Asia region. One of them was Lee Wong, Head of Family Services for Asia at Lombard Odier, which was also a sponsor of the event. Lee is a perennial in our Hubbis pages, and we have come to greatly value her insights into key emerging trends and her ability to extrapolate from those trends, future preferences and demand amongst her clientele. We have distilled some of her very insightful comments and words of advice from that event into this report.

Lee Wong, Head of Family Services for Asia at Lombard Odier, is based in Singapore and is a well-known authority on wealth and estate planning. She is also a keen proponent of engaging the next generations in dialogue on a wide range of key issues relating to their family wealth, their approaches and attitudes and, essentially, building rapport with them for the future.

Lee opened her observations at our February 10 event by remarking that most of the wealthy families that the bank works with are increasingly aware of and educated on the topic of sustainability, but at the same time, still struggle to effectively adapt their investments.

“There is a proliferation of environmentally focused and sustainability-driven investments in recent years, but there remains some confusion in relation to what makes an investment or a company's business model sustainable,” she explained. “That is somewhat holding clients back from deploying more capital, even though we see a fairly healthy interest in sustainable investments.”

Across the board…

She indicated that younger or next generation are the most engaged with all this, but wealthy private clients of all types increasingly understand and appreciate the concepts and the relationship of sustainability and ESG to their portfolios and to their wealth, succession and legacy planning.

Lee pointed to a recent Lombard Odier survey of 620 HNWIs across APAC in 2021 and that 63% of them said that they took sustainability into consideration when they make investment decisions, and 59% indicated that sustainability would generate superior returns, compared to 54% of respondents last year. 40% had actually increased the proportion of sustainability factors in their investment portfolios since Covid-19. For the other 60% who had not yet ventured in, some 59% said they intend to in the future.

Changing course, adapting to the future

“From a broader perspective, we also see clients rethinking their own family business operations, and supply chains and considering how they can apply certain sustainability principles,” she said. “It all starts with the client’s intent and value system. We need to help improve their education on these issues, so they deploy more decisions and more capital in this direction.”

The nextgens are the most engaged

She explained that the bank sees a strong correlation between age and interest in sustainability. “The topic of sustainability is deeply ingrained in the next generation, and yes, we see a lot more commitment from them than perhaps the current generation that hold most of the wealth and control,” she reported.

And Lee noted that their survey had highlighted the greatest conviction amongst the 18 to 34 age group, followed by the 35- to 50-year-olds. “The world is their future and that of their children and grandchildren, so it is natural they have a stronger conviction in the sustainability initiatives today that will bear fruit tomorrow,” she added.

Direct action

She also observed that some of the family offices she works with are actively expanding their direct investments driven by sustainability principles. “They are asking us to share our research and our technology and help them in a variety of ways,” she said. “Sometimes they are on board, but more often, we raise the concept and sort of challenge them to look into this. I feel it is the responsibility of the financial industry to serve as a steward for these issues.”

She expanded on that line of thinking, noting that the bank has a long history as a privately owned institution with sustainability at its core. “In 1841, Alexandre Lombard advised against investing in US companies that were reliant on slave labour,” she reported. “We have had an impact office for a very long time and have been driving change in our way, without making a lot of fanfare about it.”

Lombard Odier connects the dots

But the bank is now becoming more vocal in its efforts. “We are the first global wealth asset manager that became a ‘B-Corp’ certified organisation,” she told delegates. “We are also a founding member of the Natural Capital Investment Alliance. And recently, we entered into a partnership with Oxford University where we sponsored the first endowed professorship on sustainable finance.”

ESG looks back; science looks forward

“We feel that ESG is somewhat backward-looking. Traditionally, most ESG investing looks only at how companies operate - such as the practices and policies they have in place. But in practice, this tells us very little about the sustainability of a company. We believe we need a forward-looking matrix,” she said. “How can you, as an asset manager who bears the fiduciary duty to help your clients to invest better, analyse the impact of the sustainability transition on your clients’ portfolios? Well, it requires a lot of data and a lot of science to effectively measure and quantify the risks and opportunities in sustainability. Our research on climate and sustainability-related matters benefitted from in-depth review by Oxford’s climate and social scientists. “

She added that the Lombard Odier-Oxford collaboration enabled the bank to access the latest research relevant to their business. Coupled with other efforts, the bank was able to develop two concepts to help with constructing more sustainable portfolios.

A measured approach

“We developed a concept which we refer to as Climate Value Impact, which is a measure of climate risk that quantifies how companies are positively or negatively exposed to the climate transition from a financial point of view. A well-aligned company should be in a position to mitigate transition risks and take advantage of the opportunities whereas a misaligned company is likely to suffer greater financial consequences. This future cash flow analysis helps us assess the financial impact that each company may face as a result of the transition to a net zero economy,” she explained. “And that, in turn, allows us to be more positively selective.” She highlighted that this forward-looking climate-related financial exposure approach allows the bank to select companies on the right trajectory in relation to decarbonising and to deploy capital across all sectors and regions of the global economy, without creating real biases, but with a clear focus on exposure of companies to climate change and transition to a net zero economy.

Taking the global temperature

Lee referred to a methodology that the bank calls the Portfolio Temperature Alignment Methodology. “This measures the future temperature trajectories of companies, analysing a remarkable 23,000 companies in 120 countries to see where their future temperature trajectory is and to identify their alignment to the Paris Agreement,” she elucidated. “Such analysis must first and foremost be based on scientific principles, such as our understanding of how quickly the economy must decarbonise to meet the objectives of the Paris Agreement, and also how quickly individual sectors and industries must decarbonise. Integrating such analysis requires specific carbon expertise. It requires dedicated resources, beyond those of a typical financial analyst. It requires deep understanding of industry roadmaps, climate science and carbon economics, and these are precisely the areas in which we have been investing heavily.”

Reaching the core value system

To help families address these issues, Lee observed that the bank tries to engage them in considering their value system, to think about what defines their core principles and whether they are then aligned with those as best as possible.

“We help them focus on where sustainability sits in that value system, how it sits in relation to their businesses, their portfolios and their connection to the communities,” she explained. “And then we see how we can help them align across different stakeholders, and how it translates to common objectives and a family code of conduct as part of their overall approach to governance.”

Lee also explained that if the family can agree on the right governance and internal decision processes, they are well-positioned in theory to expedite sustainable investment policies and risk management protocols within the bigger picture of their totality as a family.

Data and context

“Some younger generations may be more committed to sustainable investments, but they need to back that up with data to help garner support from other family stakeholders and make a compelling case,” Lee said. “They need to put this in context and help convince others in the family of the value, the returns, and contextualise the risks of not following this path. It will take time, but that type of approach is very valuable.”

Lee said the bank refers to all this as part of the “sustainability revolution” and is making significant and constant efforts at internal training, not just for the bankers but for all employees. “We want to convey this is a way of life that we wish to embrace,” she said, “if I pop into our pantry to make a coffee, I see a poster on sustainability. This is part of who we are and what we aspire to become.”

Flying the flag

She then expounded upon how this is exemplified in their client-facing initiatives - the more the mindset at the bank is focused on sustainability, the better they will all be at carrying this banner to every single client conversation. “I am not on the investment side,” she noted, “so my focus is more driven by clients’ estate and legacy matters and to help them address this via a value system approach. Of course, that flows through to their world of investments, their own businesses, and their public market and private market assets.”

She said her approach is to help these clients connect the dots between their actions and the future of the total family enterprise. “It is about seeing a continuous storyline of greater sustainability and moderated risks,” she explained.

The Sustainability Matrix

She reported that in her next generation workshops, family scions are exposed to sustainability assessment matrices that the bank uses to assess and select companies to construct investment portfolios and they learn to apply them to their own family businesses. “Are their business models and practices sustainable?” she pondered. “Are they insulated against disruptions and regulatory pressures? Will they be resilient and thrive in the sustainability transition to be worth structuring into succession and legacy structures?”

Reality bites

Remarking in retrospect, the idea of planting a tree seemed rather quaint just a decade or two ago. “There was little urgency around climate change issues then,” she commented. “But today, people are experiencing disasters at their own doorsteps, even in the developed world, whether it is heat waves, droughts, floods, erosion, pollution, the demise of wildlife, too little snow to ski, too hot to sunbathe, so on and so forth. It is across the planet, and there are dramatic and intensifying climate-related impacts that we all experience.”

And that led to her final comment as she focused on philanthropy. “Historically, when we discuss with families regarding the social causes that they could or should support, there were differences, sometimes huge, between the different generations,” she said. “But today, the gap is closing. The elder generations, who might previously be unconvinced by climate-related initiatives are increasingly on board as they witness intensifying climate-related devastation.”