Balancing Investment Return with Social Responsibility

By: Stonehage Fleming

Bridging the gap between mindset and implementation

The results of the latest research report compiled by international family office Stonehage Fleming have revealed a gap between the mindset and implementation of responsible investing. The Four Pillars of Capital Report: The Next Chapter showed that while over 75% of ultra-high net worth families acknowledged a preference for responsible investment, only 21% are actively incorporating a values-based approach in investment portfolios.

This contrast is likely attributed to confusion about the wide range of SRI (Socially Responsible Investment) products on offer by asset managers, says Reyneke Van Wyk, Head of Stonehage Flemings’ Investment Division in South Africa. While respondents demonstrated an increasing interest in SRI, which aims to generate specific social or environmental benefits in addition to financial returns, they also confessed that on a practical level it was not as easy in the traditional investment world to do ‘good’ while also generating benchmark-beating returns for investors.

“Historically, investors have primarily been concerned with the end rather than the means, putting portfolio performance as the primary focus,” said Van Wyk. “However, as was highlighted in our Four Pillars of Capital report, this attitude is changing. For many families and private investors, the gap between investor and investment is closing.”

Considering the variety of socially responsible investing philosophies open to today’s’ investors, Stonehage Fleming believes that Environmental, Social and Governance (ESG) investing marries well with a traditional investment management approach and with the long-term investing approach of UHNW* families.

On a spectrum ranging from portfolio performance to philanthropic focus, ESG investing is an investment strategy that sits one step closer to traditional investment management than SRI strategies do. This approach has environmental, social and governance criteria embedded into the investment process from beginning to end. In practice, this means that companies scoring badly are excluded and capital is allocated to those that score well. With returns remaining a key focus, an expectation exists that companies adopting ESG practices may perform better over the long term and will be better positioned for the future.

However, due to the small size of the South African investment market in global terms, it remains difficult to implement a sustainable ESG Investment strategy without considering offshore allocation, warns Van Wyk. This aligns with the company’s viewpoint that South African residents should consider investing any surplus assets (i.e. assets not required to maintain their lifestyles in South Africa) offshore in order to mitigate political and economic risk, preserve and grow their wealth sustainably in the long term.

Van Wyk concluded: “Our considerable experience working with client families around the world has confirmed that the correct balance between socially responsible investing and financial return is unique to each family and best driven once a family has effectively discussed and agreed their purpose of wealth. This planning exercise forms an important step in the transition of wealth from one generation to the next. A strong theme underlying the decisions made will be the extent to which a family wishes to use its wealth to benefit the wider community.”

*Ultra-High Net Worth

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