Sustainability and environmental, social and governance (ESG) goals does not mean needing to sacrifice return. Family offices can make an impact while still fulfilling their investment goals, argues Cambridge Associates' Devyani Daga, in an exclusive op-ed.
Asian family offices are increasingly pursuing ESG-aligned investments for better investment outcomes and alignment with their stakeholders’ beliefs. According to a recent MSCI 2021 Global Institutional Investor survey, around 79 percent of investors in Asia Pacific increased ESG investments significantly or moderately in response to COVID-19.
However, implementing ESG themes in investment portfolios can seem complex, leaving many Asian family offices or high net worth individuals new to ESG investing wondering how to begin. We offer four guiding principles for family offices who are new to ESG investing as a starting point:
1. Challenge the Status Quo
Over the next 20 to 30 years, we believe family offices who are truly long-term investors should put radical uncertainty at the heart of their approach to risk management. In a research report we published last year, we argued that a series of sustainability issues had reached a stage whereby they would have significant impact on investment returns and should not be ignored, and that traditional financial criteria alone are inadequate.
Sustainability issues such as climate change are not cyclical, they are directional; they take us somewhere new, where historical relationships are less useful or even downright misleading. An ESG framework can be an additional set of tools for investors to mitigate risk and enhance returns if used thoughtfully.
2. Embrace Active Choices
Historically, investors have questioned whether applying an ESG lens could still aid with alpha generation, or if sustainable investing meant supporting a cause with a concession in returns. On the contrary, 2016 analysis by Cambridge Associates indicated that in emerging market equities, stock selection based on ESG scoring measures led to better performance as compared to the standard index.
Indeed, within emerging markets in particular, ‹neutral›, as defined by simple passive exposure to the broad market index, is not a desirable place to be. The index has significant exposure to companies that are not climate aligned and large state-owned enterprises with ESG issues. This is particularly relevant for families in Asia, who tend to have an overweight to emerging markets in their investment portfolios.
3. Seek New Perspectives
A broad view of ESG, one that appreciates links between ESG themes and capital markets, can shift or broaden the investment universe rather than limit it. Zooming out can help orient investors toward differentiated investment opportunities in familiar asset classes or investment strategies.
Assets such as clean energy, regenerative or organic agriculture, and sustainable infrastructure, support fundamental human needs and can align with a low-carbon economy. These assets could offer inflation sensitivity, as can carbon credit markets or public infrastructure strategies. Green bond investments can diversify fixed-income portfolios. Such opportunities can also balance a growth-oriented ESG-focused portfolio.
4. Protect Against Cognitive Biases
In truth, we all have biases and these could affect investment decision-making for seasoned leaders in ESG just as much as those who are new to the space. Confirmation bias could lead investors to misinterpret and perhaps dismiss alternatives. For instance, investors may think of ESG as a concessionary based on outdated assumptions that it requires giving up returns for values-based outcomes.
Familiarity bias could lead investors to overlook opportunities that incorporate new datasets to the investment process or that are led by emerging teams with diverse or unconventional backgrounds, traits that are often key aspects of an ESG investment approach.
Investors may also be hesitant to adopt an ESG investment lens because it may look different from peers. This narrative, however, is beginning to shift, as institutions use sustainable investing as a tool to achieve their long-term investment outcomes, on top of values alignment. For families, this is an area that the next generation is increasingly focusing on, and the fresh perspective also helps to overcome long-standing institutional biases.
Devyani Daga is a Senior Investment Director at Cambridge Associates. The firm is a global investment firm, is a signatory to the UN Principles for Responsible Investment and the Task Force for Climate-Related Financial Disclosures. Globally, Cambridge Associates serves 230+ wealthy individuals and families, working to help each navigate the intricacies of private wealth to realize their investment goals and fulfill their legacies.
