Private Banking: Demanding Times For ESG

The wealthy are ready for a more sustainable future, but struggling with just how to get there.

Everybody wants a sustainable future, and people of means are increasingly eager to support it. “Sustainably invested” funds more than tripled globally between 2012-2020, to $45 trillion, says Wally Okby, strategic adviser on wealth management at consultant Aite-Novarica Group.

The Covid-19 pandemic should accelerate the trend, revealing new vulnerabilities for human civilization and forcing people to stay home and think about them. “Covid-19 made it clear that E [environmental] and G [governance] are important, but in crises, attention should be paid to social impact,” says Marianne Verhaar-Strijbos, a managing director in wealth management at Swiss private bank J. Safra Sarasin. She is referring to the modern holy trinity of so-called ESG investing.

Ratings And Standards

Wanting to do good with investments is one thing; the how can get messy. Some 50 different rating agencies and “data aggregators” are competing to develop ESG standards, Okby estimates.

Their models spit out some weird results, adds Bertrand Gacon, chief executive at Geneva-based sustainability advocate Impaakt. Top agency MSCI, for instance, gives a higher ESG score to tobacco maker Imperial Brands than to Pfizer, whose Covid-19 vaccine is saving incalculable lives as we speak. “For private investors, this is nonsense,” Gacon says. “More common sense would be useful.”

All of which presents a golden opportunity for private banks. Lower-touch financial advisers are increasingly competitive in traditional money management, as that discipline becomes ever-more automated and quantitative. Sustainable investing, beyond a light greenwash, must be personal—matching hand-picked investments in public and private markets to very individual client priorities. “Clients are much more likely to allocate capital to the industries where their wealth originated, and the variety is great—–real estate, food, retail, tech,” Verhaar-Strijbos says.

The variety of do-good objectives is also increasing. In Europe, the heartland of sustainable/ESG investment, environment remains dominant: It’s the top concern for 54% of private banking clients surveyed last year by Deutsche Bank. But high-net-worth individuals in the Americas focus more on social impacts, while governance is top of mind for Asians. The rising social emphasis in the world’s most wealth-intensive region particularly challenges advisers, notes Markus Mueller, head of Deutsche Private Bank’s Chief Investment Office in Frankfurt. Of the ESG triad, “S” is the hardest to pin down, encompassing factors from product safety to workforce diversity, human rights and impact on economic inequality. “Social in ESG is the ugly duckling of investing,” Mueller says.

European private banks have a head start in negotiating this tangle, and a chance to strike back at deep-pocketed US-based rivals. J. Safra Sarasin traces its ESG practice back more than three decades, to a fire at a chemical plant outside Basel that tanked the owner’s share price. Bertrand Gacon created French giant BNP Paribas’ sustainable advisory 16 years ago, before starting his independent consultancy. Swiss boutiques Lombard Odier and Globalans offer standout products on a smaller scale, Mueller says.

Finding New Markets

UK-based Coutts & Co. is pushing the envelope on environmentally friendly investment. It slashed the “carbon intensity” of stocks in its funds and discretionary portfolios by a third since 2019, says Karen Ermel, director of Responsible Investing for Coutts. Clients can easily design a portfolio with “a minimum 50% allocation of underlying investments that are on a net-zero trajectory,” she says.

Continental Europe will get another push forward this summer, when an amendment to the European Union’s MiFID II directive kicks in, requiring financial advisers to discuss clients’ ESG preferences with them. “Some percentage of clients may say they don’t care, but in general it’s a big milestone,” Okby predicts.

On the other hand, more market share may be up for grabs in the US, where track records in sustainable private banking are shorter. “North America is really catching up,” Impaakt’s Gacon says. “It has the lead in volume, if maybe not sophistication.” In any geography, winning the private banking sustainability race will take more than a few staff memos from the CEO. Deutsche Bank, after some bruising times in the marketplace, invested last year in “fundamental training for all private banking staff globally,” Mueller says. “After so many years learning traditional finance, our people face a huge need to re-educate themselves on sustainability,” he adds.  

Coutts embraced the rigors of accreditation as a “B Corporation,” a designation reserved for “leaders in the global movement for an inclusive, equitable and regenerative economy,” according to its organizer, Pennsylvania-based B Lab. That has been “extremely powerful for us in making sustainability part of everything we do and every decision we make,” Ermel says. it’s difficult to determine if sustainable investments will perform well over time. Green stocks remain highly volatile, an anathema for long-term, high-net-worth management. The most popular exchange-traded fund in the space, the iShares Global Clean Energy ETF, lost a quarter of its value last year after tripling in 2020.

Smoothing out performance with a broader portfolio will mean taking on the “ugly duckling” of corporate social impact. That means different things to different clients, to put it mildly. “The social dimension is arguably the least standardizable of sustainability criteria,” Deutsche Bank Research concludes. “Much of the data is qualitative, related to intentions rather than measurable outputs.”  Prepare to nail plenty of jelly to the wall, in other words.

Post-pandemic, private banks have little choice but to forge ahead in sustainable wealth management anyway. Fully three-quarters of clients feel their “investments should have a positive impact on the world”; 57% cited the ravages of Covid-19 as a “contributing factor,” Deutsche Bank’s survey found. Those numbers are likely higher still among the clients of tomorrow: women and post-Baby Boomers. “The new generation is a lot more serious about making sure their money is invested for good,” Impaakt’s Gacon says.

The bright side may be that bona fide sustainable investing is too complicated for wire houses and online brokerages to muscle in on. It’s creating new turf for old-school private banks. “A few robo-advisers try to synch portfolios with clients’ sustainability preferences, but they haven’t succeeded in scaling as fast as they would like,” Aite-Novarica’s Okby says.

Family Affairs

The challenge of sustainable investing, and sons’ and daughters’ driving role in it, may also bear the fringe benefit of bringing families together to hash out aims and strategies. “We’re seeing the power that younger generations have on influencing their families and peers,” Coutts’ Ermel says. “Conversations with families around ESG have been extremely powerful.”

If a private banker can put themselves at the center of that conversation, it could be worth any trouble and expense. “This is a unique opportunity to have clients open up about their own personalities,” Okby says. “The intimacy an adviser can create goes way beyond the usual risk/return metrics.”

“It’s already hard to find a private bank without some sustainability on the menu,” Gacon adds. “Like restaurants having to offer a vegetarian option.” Don’t be the one serving leftover broccoli.