Next generation ‘show increasing affinity with ethical investing’

NOW in its tenth year of business, Affinity Private Wealth decided this summer to ‘pivot’ the firm towards a dedication to responsible investing.

Affinity Wealth. l to r Jon Proudfoot, Julia Warrender, Ben Stott, Jack Messervy (seated), Russell Waite and Calum McLellan. Picture: JON GUEGAN. (31954944)
Affinity Wealth. l to r Jon Proudfoot, Julia Warrender, Ben Stott, Jack Messervy (seated), Russell Waite and Calum McLellan. Picture: JON GUEGAN. (31954944)

Ian Heath spoke to group directors Julia Warrander, Russell Waite and Ben Stott about the decision and the challenges they face in investing money for purpose, not just returns.

After being established a decade ago, APW has made a name for itself in Jersey as pioneers in the world of Environmental, Social and Governance investing, known in short as ESG.

Appetite for this type of ethical investing is often said to be largely driven by a trend known as next generation wealth transfer – the movement of money and assets into the hands of the more eco and socially conscious younger generations.

Mr Waite, Ms Warrander and Mr Stott explained that a marked difference was already being seen in how investors want to use their money.

‘The pivot was an important decision for us,’ said Mr Waite. ‘Using the word affinity, we were already tending to have a natural affinity to those managers where ESG integration was part of their investment process. ‘And investor inquiries have become increasingly focused on wanting to do good with their investments, so we wanted to facilitate individuals aligning their values with their wealth.’

‘It’s particularly as money comes into the younger generation,’ added Ms Warrander. ‘Whether it’s for pensions or other assets, that type of engagement is far higher than it was for the generation before them.

‘That growing wealth among millennials is very focused on this. The conversations with that generation tend to be dominated by those sorts of values.’

Mr Stott said that day-to-day work in Affinity has evidenced this trend ‘in real time’.

‘If we invest, let’s say for trustees who are looking at the wealth that’s passing through generations, you actually see those generations within those structures,’ he said.

‘And you can see the different values coming through. That millennial generation who are in their late thirties or into their forties now are engaging with ESG and the younger generation even more so.’

Ms Warrander said that the move to responsible investing had been a ‘natural evolution’ for Affinity.

‘It wasn’t like we woke up one day and said: “Hey, we’re going to be responsible and we’re going to be sustainable”,’ she said.

‘We were naturally aligned with fund managers who thought about the environment, who thought about governance and who thought about social responsibility. The E, the S and the G.

‘We had a “white list” of funds that we use to populate our strategies and that white list just evolved to be naturally responsible.’

She went on to explain that the firm now provides two key strategies for ESG investing – both responsible and sustainable products.

‘The building blocks for our portfolios were already responsible and the sustainability came about four or five years ago,’ she said.

‘People were becoming not just focused on investing for returns and making sure they did no harm, but actually shifting to investing to make an impact too.

‘That was a bigger shift in as far as it meant that we had to rethink our funds selection process for those particular strategies.

‘We also had to think about how impactful the investments were and how much engagement a company has made to try and improve itself.

‘Now we have two sets of strategies that we run – responsible, where they’re ESG integrated but they’re principally investing, do no harm and investing for returns, and sustainable, where it’s further along that impact spectrum and they’re investing for impact and returns.’

Mr Waite said that the upcoming introduction of the EU’s Sustainable Finance Disclosure Regulation – a framework designed to assess the ESG impact of companies – was another factor in Affinity’s pivot.

‘We knew this was coming up and the managers that we would be using would all be categorising their funds, whether they’re going to be SFDR nine, which is the most impactful, SFDR 8 or SFDR 6, or not rated,’ he said.

‘When these ratings are coming out, we’re looking at our portfolios based on those ratings.’

Perhaps the most widely discussed obstacle surrounding ESG investing is “greenwashing” – businesses claiming to have eco or social credentials when in reality they do not.

Ms Warrander said it is this challenge that needs to be addressed through the introduction of assessment frameworks so that investors know exactly what they are buying into.

‘If we don’t have these sort of metrics, how can we defend accusations of greenwashing? And how can investors or potential investors make informed judgments? It’s really important but it’s complicated,’ she said.

Mr Waite explained that work needs to be done to develop systems to assess ESG credentials, including through numerical measures.

‘In our sustainable solutions we have consciously steered away from quoting metrics. We’ve been very qualitative,’ he said.

‘We’ve had metrics around engagement, but we’ve stuck around the underlying companies making a contribution to underlying themes aligned to the UN sustainable development goals. The reason we’ve done that is there is inconsistency in how impact numbers are being presented and there’s no uniform taxonomy. SFTR is almost at stage one and there’s going to be various iterations of it where they will effectively coalesce around some set metrics for both environment and social metrics. But we’re not there yet.’

He said that further work is needed to broaden existing frameworks, such as those that measure CO2 emissions, and encourage or require companies to follow their guidelines.

‘When carbon emissions are reported, they’re split into three categories: scope one, scope two, scope three,’ he said.

‘Generally speaking, most companies now will report their scope. Scope three emissions are actually the ones that are most important because they look at emissions all along the value chain, from a product being made through to how a product might be disposed of and the recycling elements of that. But there’s very few companies have committed or have the time and resource to be able to calculate all those figures. Carbon emissions data that is just based on scope one or scope two is ignoring a huge section of emissions.

‘Alongside the SFTR there’s the TCFD, which is effectively a set of metrics and guidelines or a framework for reporting carbon emissions, which is much more reliable and consistent in terms of getting accurate data but for many businesses it’s still a voluntary, rather than mandatory process. Once it becomes mandatory, we’ll have much more confidence that those metrics are credible and reliable.’

He added that the consideration of environmental issues also needs to be broadened, such as to cover bio-diversity, but again this will be a challenge to regulate and measure.

‘The world is fascinated, for the right reasons, on carbon emissions needing to come down but there are a whole host of other very important metrics that need to be measured,’ he said.

‘As a team we have really turned our attention to biodiversity and metrics around how do you put a monetary value around natural capital? There’s work being done around creating a framework for reporting that.’

Another challenge Ms Warrander identified was balancing the positive and negative impacts companies might have from an ESG perspective.

She said that this was particularly the case with big players who have the wealth and power to make the difference the world needs.

‘We had a particular client who was concerned that we use JP Morgan as one of our asset managers,’ she said.

‘The reason they cited was correct. They’re still one of the biggest lenders to “brown” non-renewable energy sources. But as we’ve seen with gas prices, petrol queues and other things recently we’re not in a position where we can switch to fully renewables right now.

‘We need the banks to still be lending in that order, so that hospitals can run, people can get to work etc.

‘The other side of it is, actually when you look at it JP Morgan is also one of the biggest lenders to the renewable space. You could say be strict around this and say we’re not going to use anything that JP Morgan touches, but actually is that really helping? Banks are going to be a hugely important component of achieving the Paris accord, because if they don’t help provide investment to fund the transition to net zero, we’re quite simply not going to make net zero.’

She added: ‘I think one of the hardest thing about responsible and sustainable investing is if you come at it from the exclusion point of view or think I’m not going to invest in any company that isn’t perfect, it’s not going to work. The journey we’ve been on is realising that sometimes you have to invest in non-angelic companies but it is the overall momentum and materiality that’s really important.’

Mr Stott cited Microsoft, which has won controversial contracts with the US military in recent years but at the same time committed to enormous environmental programmes, as an example of this sort of conflict.

‘Microsoft’s obviously a very high-profile company,’ he said. ‘One of the things that they have committed to do is not only go carbon net zero. They’ve committed by 2040 to neutralise all emissions since they started their business and actually invest in programmes that do that, through reforestation programmes and so on.

‘But on the other side of the ledger, last year they won a contract called JEDI from the US government, which is a contract to provide cloud services to the defence sector. They also won a contract to build augmented reality headsets to train US soldiers.

‘If you take certain views, then you can massively restrict what you can invest in. What you’ve got to do is say where do we begin and end as a business. This is what sustainability means to us. For some clients this won’t tick the box, but you’ve got to accept that because you can’t be all things to all people. But what we passionately believe in is that direction of travel and supporting that direction of travel to make the world a better, more equitable and hopefully more sustainable place to live in.’

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