Private Wealth — Netting Rich Returns

Themed funds were an attractive entry point for clients with little or no experience of sustainable investment, according to a United Nations Environment Programme Finance Initiative study, Unlocking Value: The Scope of Environmental, Social and Governance Issues in Private Banking, published in 2007.

Project manager Remco Fischer says themed funds are popular among individuals whose investments are not big enough to influence a company’s strategy in the way a large institutional investor can. Large institutions, such as the Californian state pension funds CalPERS and CalSTRS, can take big stakes in companies and devote time to becoming active owners. “It is very difficult for private clients through their service providers to engage in active ownership,” says Fischer.

Despite wanting to make a difference through “green” funds, many high net worth individuals are not comfortable with that label. The UNEP FI report found that “ethical” or “socially responsible” investments had much broader appeal if they were framed in terms of “portfolio diversification”. Fischer says: “It’s a marketing exercise.” Wealth managers must “communicate the issues in a way that does not scare clients and makes the investment have a certain edge”. Fluffy green goals are out; strong risk-adjusted returns are in.

Obstacles
How sustainable investment products are sold to high net worth individuals is key to their uptake. At the moment, observers agree that the wealth managers, also known as relationship managers, who advise high net worth individuals on their investment strategies are not well versed in sustainability. This means they are less likely to recommend sustainable investment products to clients, even if such products exist within their own organisations.

Christensen says relationship managers in private banks have weak ties to their socially responsible investment teams — either the analysts or portfolio managers.

The introverted world of private banking means that relationship managers could miss opportunities to sell new products to clients. The failure of relationship managers to sell sustainable investment products available in-house could even be happening in organisations signed up to the UN PRI, Fischer says.