Next-generation heirs are increasingly vocal about wanting to align their legacy fortunes with their values, through investments by their family offices in funds, projects and startups that pursue both financial returns and a positive benefit for the environment and society.
But tense intergenerational discussions are stymieing a substantial or whole-scale shift to impact by all but the largest offices, leaving most wealthy families to consider or opt for incremental allocations instead.
For now, that is.
Just 12% of family offices view climate change as a top risk by early next year, according to UBS’s 2024 Global Family Wealth report, which surveyed 320 family office clients across more than 30 countries between mid-January and mid-March. The clients, who have an average net worth of $2.6 billion and $600 billion in collective assets, flagged geopolitical tensions, higher inflation, a correction in real estate markets and interest rates as their main worries.
The looming opportunity on the horizon: Nearly one in two, or 44%, of family offices see warming temperatures caused by man-made greenhouse gas emissions as a major concern within the next five years.
“The inflection point of allocation is within line of sight,” Amantia Muhedini, an executive director and sustainable investing strategist at UBS Global Wealth Management, tells ImpactAlpha. “It’s not right now. It’s at some point in this rolling five years.”
More than $84 trillion will pass to younger heirs globally by 2045, Cerulli Associates estimates. As an under-tapped source of impact, particularly for catalytic capital, given families’ patient, long-term focus that’s not tethered to outside shareholders or other pressures, the private capital has a key role to play in financing green solutions.
ImpactAlpha’s Lynnley Browning chatted with Muhedini to hear how UBS’s family office clients are shifting toward impact.
ImpactAlpha: There’s a lot of variation across geographies in how family offices approach impact, but are there some common themes?
Amantia Muhedini: We’re seeing two things. The anti-ESG pushback in the broader market, in the US in particular, has been a little different for us, because our client base that is focused on sustainability has been the largest family offices. In some ways, we haven’t seen the impact that is broadly captured by Morningstar showing ESG fund flows being down — these families seem to be more immune to it. We’re seeing these families have very slow, very deliberate conversations, but they are allocating, and they seem a little insulated from the broad market trend. I start with that, because when people look at data, look at headlines, they expect lower activity. And that’s not the case.
There’s a lot that’s been written and discussed around the generational wealth transfer with the hypothesis that it will drive more assets towards impact and sustainability. I’d say from our seat, that’s both true, and it needs to be complicated as a view.
So this year in particular, we’ve had multiple engagements — with US in particular, but also APAC and European large, institutional-like families — that are allocating to impact and are driven by principles or by the lead decision makers changing hands. For the most part, what we’re seeing is that the next gens call us. They call their financial advisor, so they’re having these discussions. There’s still a lot of friction within the family on allocating or moving a significant chunk of the portfolio. A lot of what they’re doing is experimenting.
ImpactAlpha: Can you give some anonymized examples of your family office clients?
Muhedini: So for an example of “the money is moving,” we’re working with a large family where the wealth creator passed away in the last year and a half. He passed away in his 80s, and had come from very humble beginnings. And in some ways, he had in his later life started to become philanthropic because of this understanding of “I came humble beginnings, and I want to give back.” What’s interesting is that with his passing, the next generation is switching the entire portfolio towards impact and sustainability. So the ethos was there in the family. They actually started implementing and rewrote their strategy. They won’t do this overnight. But they have a plan, and they have a certain number of years and a target by which they’ll get to this.
They’re focused on economic mobility, and economic development. So for them, that means economic empowerment, healthcare, education, a broad range of diversified social themes. Essentially, I also say for our US families, we’re seeing a lot of interest in these social themes when they call their advisor. The question they ask is, “How can we invest?” Contrast this with APAC, where our equivalent families are not investing in social themes, and that’s largely because of regulatory difficulties, in particular in China. So that’s an interesting point of distinction.
The challenge is that not all families are actually allocating 100% of their portfolios. So the example I gave you is still anecdotal. What we’re actually seeing is families saying, okay, let’s do a carve-out, or let’s do a carve-out by asset class. So maybe some of our venture investing will be focused on the “x” area — climate, healthcare, something that they care about. Or alternatively, maybe they’ll say, “x percent of our portfolio will be invested across different asset classes that have a sustainability or impact tilt.”
Only a handful of the largest, most sophisticated ones are starting to think in this direction of how to go 100%, which is what we at UBS think is possible to do. It’s a lot of what our messaging and research has been for a few years now.
ImpactAlpha: So moving from carve-out to a total impact lens is a trend?
Muhedini: It’s the beginning of the trend. I think once you have more of the next gen taking control of the assets versus [simply] being invited into the boardroom, we might see more of that.
It’s an opportunity and challenge at the same time. There’s definitely a kind of expressed interest and desire to support emerging managers and early innovations, but we’re less seeing it being done, and that’s because some of the challenges have to do with scale. The families that are the largest are able to get there with their CIOs to write these checks. Often those checks need to be significant, and the cost of due diligence of smaller managers becomes really high. And so you still have this challenge of, “I can’t over-allocate to a smaller manager, or if I do, maybe I won’t do it all the way through fund one, two, three and four, until they scale.” So from the theory and the interest to the actual practice, I think we still have some gap there.
Whether you are evaluating an investment for a fund that is raising $50 million or a fund that is raising $1 billion, the effort of doing that [due diligence] is the same.
ImpactAlpha: That presents a sort of bind, because potentially the most impactful investments could go to startups that are small-scale.
Muhedini: That’s the structural challenge in the market at the moment. So it’s interesting to watch the families have these debates.
ImpactAlpha: Are family offices scaling back their philanthropic side in favor of a direct investment side, or is it a twin-track thing?
Muhedini: That’s where next gen are coming in. And they’re saying, let’s also invest the portfolio in addition to the charitable giving that we’re doing.
ImpactAlpha: Is it fair to say that UBS’s role is not necessarily to be prescriptive?
Muhedini: My whole role, and that of my team, is to publish research almost every day, definitely every week, that shows how sustainability impacts investment. We have a whole team that focuses on family advisory and runs workshops for families. Often you’ll start by articulating the investment case. So that’s when you know if the next gen are having more success, if they’re making the performance case.
Also, the way that we are working with them is to help them mirror an existing asset allocation. To hold your core portfolio with just tilts, perhaps, so that you’re not going too far out from what you see. That’s a kind of a strategy which I’d say is more likely to succeed, but it becomes very family-to-family dependent.
ImpactAlpha: Are there situations where there is not an intergenerational meeting of the minds about impact, and things can’t be reduced or solved?
Muhedini: Those are the majority. Another anecdotal case: a different family where the adult daughter is invited into the boardroom of the family, but it’s still the father that guides decision making, and she has a different view around impact and time and gender lens and private markets. But the family has been investing very successfully the same way for 40 years. And so what we’re doing there is, we’re just providing consistent education. I mean, who knows? It doesn’t seem like, for the next couple of years, they will change their investment strategy in any meaningful way. Which goes to my earlier comment that we’re starting to get somewhere towards that point of inflection.
