ESG investment - short term blip or out in the cold?


In recent years, there has been constant discussion in the media and elsewhere of the growing importance of ESG investments. As Private Client lawyers advising trustees and family offices, we have increasingly found ourselves considering the issues that ESG investments raise in relation to the duties of fiduciaries, responsible for managing the wealth of others. We advise such fiduciaries as to how they can balance the competing interests of different family members, between those prioritising their environmental and social concerns, and others who are more focused on the need to maximise financial returns.

There have always been concerns about the financial performance of ESG investments, when compared with more traditional funds. However, the assumption has been that, as environmental concerns grow and legislation tightens, the value of companies that take a sustainable and environmentally-aware approach to business will translate into greater returns for their investors. In contrast, companies that ignore such priorities may lose value and even be wiped out entirely.

This still seems likely in the longer term. However, as the article below demonstrates, the current financial climate and cost of living crisis is drawing investors back to more familiar territory, in an effort to maintain a reliable financial return.

None of this is surprising, but the figures cited in the report are interesting, and tend to support the long term trend expected. Less than a quarter of "Boomer" investors (born in the post-war years up to 1964) and a third of "Gen X" (born between 1965 and 1980), report prioritising ESG factors when investing. In contrast, approximately half of "Millennials" (those born between 1981 and 1996) and "Gen Z" (1997 to 2010, approximately) investors do so. These figures are also supported by evidence outside the investment world, for example, reports that new graduates increasingly consider the ESG credentials of potential employers before applying for or accepting jobs.

Taking this into account, it is perhaps not surprising that ESG investments may be suffering a short term decline in interest, given that older generations control much of the world's wealth. However, the anticipated "Great Wealth Transfer" from the Boomer generation and, in time, Gen X, to their Millennial and Gen Z children and grandchildren, will grow in impact over the next few decades. As this progresses, it seems likely that younger generations will continue to be keen to balance pure financial return with social and environmental impact. This should once again turn their focus, and that of the trustees and family offices that oversee their wealth, towards ESG investments.

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"With the need to maximise returns seemingly growing in importance amid the cost-of-living crisis, fewer investors seem to be factoring ESG-related considerations into their investment decisions."
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