Making A Difference Post-Pandemic

Such tumultuous circumstances are already shaping how private individuals, families and family offices are approaching their investment and succession planning strategies in the long-term. For instance, research by Knight Frank in its 2020 ‘Attitudes Survey’ revealed that 70 per cent of wealth advisers globally have seen an increase in their clients’ philanthropic activities.

Further, when combined with a long history of supporting philanthropic endeavours, it is the investment choices made by family offices now that have the chance to prompt real change while supporting economic recovery.

This trend is even more apparent when taking into consideration the next generation of wealth owners.

Now more than ever there is added impetus for that next generation to think carefully and in targeted ways at how they could make a positive impact by addressing the specific – and potentially highly complex – issues thrown up by the pandemic. If they get it right, aided by the right support, they stand to make a considerable difference.

New Horizons

Set to inherit an estimated US$15 trillion by 2030 (Wealth-X)[i], the NextGen are already focusing on how investment decisions can make a positive impact on the world.

Since arguably it is this younger generation that expresses its concerns and demands action about climate change most vociferously, as they become custodians of the family wealth, it is beyond doubt that Environmental, Social, and Governance (ESG) considerations will take on even greater importance.

This trend has been further accelerated by COVID-19; a recent study published by Jersey Finance and undertaken by Family Capital[ii] found that 30 per cent of wealthy families surveyed had increased the role of NextGen in the decision-making process as a direct role of the pandemic.

The study, which directly canvassed the views of 50 family offices in Europe, the US and Asia, highlighted the significant role NextGen will play in investment decision-making, whether it be through existing family office structures or in setting up new investment groups, with 62 per cent of those surveyed believing NextGen will become intimately involved in their family office in the future.

Consequently, with this generation becoming more influential in future planning, it is becoming increasingly important for advisers in the family office space to be conscious of their specific drivers.

For example, the NextGen are placing the advisory community under greater scrutiny, being more demanding in terms of transparency, wanting quick access to information and demonstrating mounting concern around greenwashing.

But with the emphasis on ‘doing good’ becoming central to all investment decision making rather than limited to structures specifically ear-marked for philanthropic endeavours, the NextGen are truly taking the reins in driving a more sustainable approach.

Good Governance

The importance of communication and education in ensuring effective corporate and family governance were also highlighted as of major importance by respondents to the Family Capital research.

With sustainability in both business and investment strategies higher on the agenda than ever, the importance of effective governance around key elements such as succession planning and formalised family values are now being seen in a far broader sense – that of bridging the founding and future visions of the family to safeguard a legacy while also impacting positively on the world.

In a recent study, WealthBriefing, supported by Jersey Finance, looked at sustainable family governance models in an evolving environment.

Notably, the ‘Virtuous Circles’ report found a clear majority (61 per cent) of advisers believe that enterprising families should have a formal governance programme in place by the time they have £50 million in assets with a substantial 28 per cent putting the threshold at a far lower £20 million.

Aside from setting down practical rules, governance programmes are instrumental in supporting meaningful action in the wider world based on a family’s most deeply held values. Creating a robust framework and articulating these values, however, can be challenging.

And, while 74 per cent of advisers identified a formal business succession plan as vital to effective governance, globally only around 30 per cent of enterprising families have such plans in place (Global Family Business Survey 2021, PwC; STEP Global Family Business Survey, 2019).

Formalising how the management and ownership of a family’s business empire and other assets should be transitioned is crucial in avoiding the confusion and conflict that can destroy not only financial value but family relations and, for this to be successful, clear values must also be set down as part of governance efforts.

This can be easier said than done, however, with millennials and Gen Z typically focused on climate change versus baby boomers leaning towards safeguarding investments and businesses.

These needn’t be mutually exclusive though; sustainable equity funds and sustainable taxable bond funds outperformed their non-ESG peer equivalents by a median total return of 4.3 per cent and 0.9 per cent respectively in 2020 (Sustainable Funds Outperform Peers during 2020 Coronavirus, Morgan Stanley Institute for Sustainable Investing, 2021). Plus having a variety of voices and attitudes within wealthy families can be a force for good by offering a more comprehensive approach to ESG.

Structuring Considerations

It is clear that the general direction of travel is one where philanthropy is no longer an ‘add on’ to a wealth management strategy but is in fact a serious consideration from the outset, whereby ordinary investors can make a great difference in the world.

This approach carries significant potential; UHNW families are able to take a longer-term view without experiencing return constraints in the same way as other investors which, when combined with families’ time-honoured dedication to philanthropy, allows their ESG and impact investing strategies to play a clear role in solving global problems.

However, it can be expected that this will also lead to greater demand for more evidence-driven approaches to meet sustainable development goals. This will only happen effectively if the industry invests in new tools for reporting and measurement, and in data-driven analysis and metrics which take advantage of the digital technology’s growing influence on financial services.

For these reasons, advisers need to be alive to the need to demonstrate robust ESG credentials and consequently upskilling is likely to be a core part of the fiduciary landscape over the coming years.

As far as structuring is concerned, an ESG approach brings with it a need for further considerations in areas such as the tax treatment of ESG assets, whether or not ESG and non-ESG assets should be segregated, a family’s risk profile, and the potential for family conflict. Documentation and clear evidence of these sorts of considerations are essential in demonstrating that a prudent approach has been taken.

But, with families constantly changing and the world evolving rapidly, there are strong arguments for retaining an element of flexibility within structuring and caution should be exercised when it comes to ‘hardwiring’ ESG investing into trust constitution documents, investment policy statements or letters of wishes.

Making The Right Choice

As investment strategies designed to make a positive difference enter the mainstream, quality IFCs will have a major role in bringing such strategies to fruition.

With six decades of experience, Jersey has earned a reputation as a leading IFC when it comes to supporting individuals and families with their cross-border wealth management, succession and legacy planning objectives.

Over those six decades, the Island has adapted to a constantly evolving private wealth landscape and today manages in excess of £1.1 trillion of private client assets, with those clients spanning Asia, the Americas, Europe and Africa.

But the Island has also proved attractive due to its future-focused and nimble approach.

For instance, digital solutions are being driven by the NextGen, whose expectations as digital natives are for real-time access to expertise and support. In response, Jersey has progressed its digital infrastructure and today can boast the fastest broadband speed globally while also having earned itself a reputation as a hub for regtech and wealthtech development.

Jersey Continues To Innovate Too

Last year, Jersey Finance launched its sustainable finance strategy and vision, designed to put Jersey on a path to being recognised as the leading IFC for sustainable finance in the markets it operates in by 2030.

One year on from that launch, significant headway has already been made in delivering on the various workstreams under this strategy; in particular, Jersey has become a member of the UN-convened Network of Financial Centres for Sustainability (FC4S) and conducted a full audit of its sustainable finance capabilities.

Later this year, the Island will also host its first sustainable finance awards to champion those businesses that are truly accelerating the drive to a better future.

As philanthropy evolves with digital innovation and the priorities of a new generation of investors come to the fore, the private wealth industry must also adapt and it is incumbent on quality IFCs to keep pace to ensure a better future for all.

Footnotes:

[i] https://go.wealthx.com/world-ultra-wealth-report-2021

[ii] Family Offices and Investment, The Generation Shift, How the COVID-19 Pandemic has Accelerated a Generational Shift in Investment Priorities – compiled by Family Capital in association with Jersey Finance

Robert Moore
Director - UK