“While the concept was considered inspirational in the past, it is now more common to hear about family offices ingraining ESG principles into their overall governance framework.” — Bill Bijesse, tax principal and global family office markets leader at RSM
The rise of environmental, social and governance, known as ESG, has many family offices considering its relevancy to their purpose and operation—but likely for different reasons than other investors in the private market. While asset managers and private equity firms may feel pressure over ESG policy development and reporting as part of ongoing portfolio management, family offices are not subject to or driven by investor expectations or mandates.
Nonetheless, there is a compelling reason for a family office to embrace ESG—its potential impact on the family’s legacy.
“Aligning investment practices with ESG goals allows high net worth families to establish a purposeful legacy that extends beyond lasting wealth,” says Anthony DeCandido, a partner in ESG advisory services at RSM US LLP. “There is also strong empirical research showing ESG can increase investment performance, so family offices should view ESG program adoption as smart business.”
Moreover, family offices might want to consider following the lead of private equity funds choosing to prioritize ESG because of its many side benefits, such as attracting top talent. For family offices, the goal could be to engage younger, more aspirational offspring in the family business.
Build on the foundation of the family office governance framework
In his 25-plus years advising individuals and families with significant wealth and assets, Bill Bijesse, tax principal and global family office markets leader at RSM, has noticed a progressive shift in mindset toward ESG adoption.
“Particularly among the younger generations, leaving a positive impact on society is now considered an integral part of a family’s mission and values,” says Bijesse. “While the concept was considered inspirational in the past, it is now more common to hear about family offices ingraining ESG principles into their overall governance framework.”
There is also growing evidence that family offices are prioritizing ESG in their investment planning. According to the UBS Global Family Office Report 2021, sustainable investing is firmly entrenched in portfolios, with a significant number of family offices across the globe making ESG-focused investments, and many planning to increase those investments in the coming years. Driving this trend is an increasing sense of responsibility to demonstrate ESG consciousness.
A family office doesn’t have the same fiduciary responsibility as a traditional general partner, who must act in the best interest of investors by delivering a positive financial return. This gives family offices more liberty to choose where and how to invest their assets, as well as more choices for ESG integration. To make the best investment decisions, many family offices are seeking the advice of ESG-focused professionals to help them identify the right opportunities in line with the family’s interests.
Develop an ESG strategy with the family’s mission and values in mind
“When working with a new client, I always ask family members what they are passionate about and what they want their legacy to be,” says Bijesse. “By understanding what is important to the family, you can start to build a successful impact investment strategy that meets their wealth planning objectives while also serving a higher purpose.”
Family offices can leverage tools such as stakeholder mapping and ESG gap assessments to identify key drivers and potential opportunities to achieve the family’s vision and goals. It’s important to encourage engagement from all corners of the family office to help incorporate ESG into core business activities and generate ideas to expand on the program. Keep in mind the push for ESG is often driven by younger staff and family members because of their generational mindset geared toward social and environmental consciousness.
Bijesse recommends taking a bottom-up approach to collect perspectives around ESG priorities. Better yet, assemble a task force of cross-functional teams and multigenerational family members to identify and evaluate risks and opportunities. Having equal representation across the organization will ease program alignment and drive more successful ESG outcomes.
“Revisiting this topic at annual meetings to sustain family member alignment will help pave the way to a multigenerational legacy of harmony and purpose,” adds Bijesse.
Assess ESG priorities based on the family office’s unique needs
Every family office will have its mix of ESG priorities, influenced by the entity’s structure, purpose and years in operation. While a new family office may focus on adding ESG oversight to its organizational capabilities, a more established office might want to expand ESG’s role in achieving operational excellence.
Opportunities abound to connect ESG goals with current business priorities. For instance, how a family office vets its service providers can be considered part of its ESG risk management program, as can its method of safeguarding third-party access to sensitive data.
If investment activities carry broad societal reach, what steps is the family office taking to ensure sustainable outcomes? Particularly given the increasing scarcity of natural resources, what impact do family operations have on the environment?
Chances are the family office is already factoring ESG considerations into many critical decisions concerning the family business. Formalizing a commitment to ESG may be a matter of recognizing these efforts as part of the family office’s ESG framework.
Measure ESG efforts and performance to determine success
If a family office decides to embrace ESG, all efforts should be measured to provide context and meaning. How else could an organization verify that an impact investment is fruitful, or if asset management changes make a difference?
One way to track progress is to use a proven societal return on investment (SROI) methodology to quantify and monetize ESG efforts in relation to financial and nonfinancial performance. From a transaction advisory perspective, evaluation methodology can be leveraged when selecting and then valuing private businesses. Through ESG due diligence, a family office can identify the predominant ESG risks that could affect pricing of a deal.
To aid with performance measurement, integrated technology solutions are also available to aggregate data from disparate sources within an investment. These innovative tools can help track ESG performance across a portfolio.
“The adage ‘what you don’t measure you can’t manage’ certainly applies to ESG program management,” says DeCandido. “What makes it particularly challenging is there are no uniform reporting requirements—so it’s imperative to benchmark within the company, among its direct peer group, and within the industry it operates in.”
Tap all opportunities to add value with ESG
From making a lasting impact to recruiting and retaining top talent, family offices stand to gain many advantages from embracing ESG. Here are just some of the opportunities to incorporate ESG principles and behaviors to achieve goals:
- Document policies and practices as part of the overall governance framework and family office constitution
- Consider ESG in all aspects of risk management
- Implement an impact investment framework
- Provide transparency into investment decisions and holdings
- Measure investment impact
- Maintain asset efficiency
- Evaluate systems and tools to support sustainability
- Report goals and outcomes to stakeholders
- Recruit and retaining staff
- Engage younger family members
- Instill an environment of continuous learning and development
- Promote a diverse set of views