Written by 3:00 am EU Investment

Investors stick to ESG commitments for a greener future

For Colorado-based Doug Spencer, the devastating floods that recently hit Yellowstone National Park presented compelling evidence for his conviction that investing with an ESG (environmental, social and governance) lens has never been more important.

Like many wealthy investors, Spencer, who is on the park’s board, is undeterred by Russia’s invasion of Ukraine, soaring inflation or oil price spikes. If anything, the turmoil has prompted Spencer, a philanthropist and full-time impact investor, to increase his commitment.

“In the past year, I’ve doubled down on my alternative energy investments and investments in climate solutions,” he says. “And not just solar and wind but a broad portfolio.”

Spencer made money in business early in his life: he rose to lead firearms manufacturer Cooper Arms, a maker of single-shot shotguns, and sold the company in 1997 for an undisclosed sum at the age of 41.

Water pours down a hillside as huge parts of the tarmacked road are literally washed away
Parts of the North Entrance Road in Yellowstone National Park were washed away by floods in June © National Park Service/Getty Images

Having sold his business, he shifted his focus to social impact by working in microfinance institutions (which serve poorer borrowers) and organisations tackling global resources challenges (such as water scarcity), as well as by using his investments to help solve social and environmental problems. “If you’re going to invest for the long term, those are the kinds of places you need to be now,” he says.

Spencer is not alone. Despite recent geopolitical and economic upheaval, many wealthy investors are not abandoning their ESG commitments. Quite the opposite, says Erika Karp, chief impact officer at Pathstone, a multifamily office that manages $40bn on behalf of its clients, of whom Spencer is just one. “Families want to keep a cohesiveness — in times of crisis that’s important.”

Erika Karp, chief impact officer at a multi-family office that manages $40bn on behalf of its clients, sits on a wall in front of a landscaped garden and path
Erika Karp is chief impact officer at Pathstone, which manages $40bn on behalf of clients including Spencer © Matt Nager

Data from Savanta, a research company, support this view. In a survey conducted after the Ukraine invasion, about 80 per cent of the 27 wealth managers polled said they expected interest in ESG among their clients to increase in the next 12 months.

For some family offices, soaring oil prices have made it possible to increase ESG investments. “The performance of the oil companies has been an opportunity for us to sell their stocks and expand into other sectors,” says Pierluigi Ventura, chief executive of the PFC Family Office, which manages the assets of the Marzotto family, and is run by Giorgiana Notarbartolo.

The positive approach of at least some wealthy investors comes in contrast to the ESG backlash that recently emerged in the broader investment community.

Last year, for example, Desiree Fixler, former global head of sustainability at German asset manager DWS, made public her concerns that DWS had misrepresented its ESG capabilities, sparking broader concerns about so-called financial greenwashing. In May, German police raided DWS’s Frankfurt offices in an investigation into alleged mis-selling of green investments.

Then, in the first quarter of 2022, ESG investing across the financial sector took a hit in response to tech stock volatility, the Russian invasion and interest rate hikes in the US, with inflows to ESG funds halving, according to the Institute of International Finance.

The world’s largest money manager has also shifted its position on ESG. BlackRock said in May it would support fewer climate-focused shareholder resolutions this year and that, as a result of Russia’s invasion of Ukraine, more short-term investment in traditional fuel production would be needed to increase energy security.

When it comes to the clients of Jonathan Bell, chief investment officer at London-based Stanhope Capital, the picture is mixed. One group, he says, is committed to investing in an environmentally friendly and socially sustainable way. “They are sophisticated in that approach,” he explains. “And what’s happened in the past six months doesn’t change their views.”

By contrast, he says, another group — clients who focus on social impact through philanthropy but on financial returns in their investing — applied an ESG lens to their portfolios when it was easy to make money. “You invested in growth in companies with minimal [carbon] footprints and you outperformed the market,” he says.

For these clients, the market’s poor performance at the start of this year changed the equation, prompting them to look elsewhere for returns. These clients, he says, are making the shift “covertly rather than overtly” by moving to a different fund manager.

“If that manager has a value bias or a cyclical bias, the chances are that your carbon footprint will get worse,” he says. “But you justify the move on changing the style bias, given how poorly growth did in first three months of year.”

However, many wealthy private individuals and families are sticking to their sustainable investing strategies regardless of such concerns. And some of the world’s wealthiest are taking an increasingly activist stance on environmental issues.

In Australia, for example, tech billionaire and Atlassian co-founder, Mike Cannon-Brookes, launched a successful shareholder campaign that blocked AGL Energy, the country’s biggest carbon emitter, from spinning off three coal-fired plants. “We embrace the opportunities of decarbonisation with Aussie courage, tenacity & creativity,” Cannon-Brookes wrote in a tweet on learning of AGL’s decision to abandon the demerger.

Cannon-Brookes had objected on environmental grounds, since the resulting company would have run the plants into the 2040s, which he argued was not consistent with Paris agreement climate goals. He was pushing for them to be shut down by the early 2030s.

Mike Cannon-Brookes sits wide-legged on the stairs of the Hyatt Regency in Sydney, with a beard and baseball cap, white T-shirt and jeans
Mike Cannon-Brookes, co-founder and CEO of Atlassian, launched a campaign to prevent the sale of coal-fired plants © Renee Nowytarger/Getty Images

Even Carl Icahn, the billionaire activist investor and corporate raider, recently launched a campaign with an ESG flavour when he acquired 200 shares in McDonald’s to push the chain’s management into improving conditions for the animals that go into its burgers.

This kind of investor pressure is something that billionaire and outspoken climate activist Sir Christopher Hohn — whose firm, TCI Fund Management, has more than $40bn in assets — expects to see more of in the coming years. Hohn is pushing the companies that TCI invests in to become more transparent about their emissions reduction efforts. He also favours mandatory regulation on corporate climate disclosures.

Hohn believes high oil prices are a wake-up call that will accelerate the shift to a low-carbon economy, with the Russian invasion already sparking EU support for renewable energy funding as a way to reduce imports of Russian gas.

“The whole world should now be focused on seeking alternatives, whether it’s renewables or nuclear or hydrogen or synthetic fuels,” he told a Financial Times Climate Capital conference in March. “Suddenly, all of these things are far more economic.”

Hohn’s argument is gaining support. For many investors, the Russian invasion has merely increased the investment appeal of the clean energy technologies needed to put the world on a path to net zero (emissions levels that are in line with the Paris climate accords).

“Recent events in Ukraine have laid bare the risks of relying on fossil-fuel supplies,” says AJ Singh, executive director in the ESG team at UK wealth manager Brown Shipley. “Moving to local renewable energy and adopting other clean technologies is becoming paramount.”

Singh says that investors should also take note of how the Ukraine war is shifting the energy goals of governments such as the EU, which has promised to block Russian oil imports by sea by the end of this year and reduce gas imports from Russia by two-thirds within a year while accelerating investment in renewable energy.

Nor is clean energy the only focus for wealthy ESG investors. Some are also looking at asset classes that can both meet ESG criteria and deliver healthy returns at a time of rising inflation, which pushes up borrowing, labour and materials costs for companies. “We are seeing clients look at real assets because they have an inflation bias,” says Singh. “Green infrastructure, green buildings and commodities have done pretty well.”

This is also the case for PFC. “The only thing that has changed this year is that we prefer some sectors because of inflation,” says Ventura. However, he stresses that an ESG lens is still used when making decisions about what to include in the portfolio.

Real assets that PFC favours include green real estate and the construction materials used in green buildings. It is also moving into the chemicals sector but with an emphasis on companies that are working on solutions to environmental problems, such as developing alternatives to single-use plastics.

In making such choices, wealthy families are increasingly listening to younger members such as Notarbartolo, who wants to use environmental and social impact as a framework for investing. “We’re seeing that generational shift with regard to managing family wealth,” says Karp. “And this generation is more progressive.”

When considering ESG principles during turbulent times, private and family investors have the advantage of being able to take a longer-term view. “Unlike institutions like banks and insurers, we have a different perspective because we have to think about the future of the family,” says Ventura. “And it’s impossible to have impact in the short term.”

Spencer is another investor who is prepared to take lower returns in the short term for future gains. For him, a 6 to 8 per cent annual return across all his investments is acceptable (the S&P 500’s historical average is about 10.5 per cent). “I think about it in terms of how much it’s worth to know that the capital I’m deploying is doing some good in the world,” he says.

Moreover, he believes that, in the end, these investments will pay off. “I may not make a good return on my solar investments for a few years,” he says. “But I bet you, in 10 years’ time, I’ll be hitting some home runs.” 

This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment

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