Sustainable Wealth Management: Reaching a Tipping Point

On 22 September, China’s announcement to the UN General Assembly that it intends to become carbon-neutral by 2060 made headlines everywhere. The world’s second largest economy and biggest emitter of greenhouse gases became one of only about 20 countries, supranational organisations and provinces to set a target for net-zero carbon emissions.[1] This was an important step forward in the global community’s efforts to reach the targets of the Paris Agreement and deliver on the United Nations Sustainable Development Goals (SDGs) for 2030.

China’s commitment may prove to have been a tipping point on the road to net zero emissions. And the year 2020, marked by the Covid-19 pandemic, may also prove to have been a tipping point for capital allocations towards investment strategies that seek to support the transition towards a more sustainable and equitable global economy.

For many, the pandemic has served as a wake-up call about the kind of world we want to live in – and pass on to our children. “We need to stop, take stock of where we are today and ask what we need to change to ensure that our economies, financial markets and investment portfolios are sustainable for the long-term,” says Arnaud Tellier, CEO, Asia Pacific at BNP Paribas Wealth Management. “BNP Paribas has a strategic commitment to sustainable growth and to helping our clients achieve the same goal.”

Following the money

The value of ESG assets under management is growing rapidly: investments meeting ESG criteria almost doubled between 2012 and 2016, and more than tripled by 2020, reaching $40.5 trillion globally.[2] The largest pool of ESG assets under management is in Europe, with USD14.1 trillion, while that in the US totals USD12 trillion – and is growing faster than Europe’s. Deloitte predicts that by 2025, nearly half of all U.S. managed assets could be ESG-mandated investments.[3]

This shift of capital towards sustainable strategies is accelerating. U.S. sustainable fund inflows continued to grow at record speed in the second quarter of 2020, bringing the first-half aggregate to $20.9 billion – close to last year’s total of $21.4 billion.[4] And flows in 2019 beat the previous annual record four-fold. “Investors are looking for ESG opportunities,” says Tellier, “and they want strong propositions from their providers.”

Performance premium

Evidence is growing that investment performance can be enhanced by incorporating ESG criteria, particularly during challenging times. According to research released by Morningstar in June this year, close to 60% of European sustainable funds delivered better returns than similar conventional funds over the last 10 years.[5]  As markets struggled with the impacts of Covid in the first quarter of this year, the MSCI AC Asia ESG Leaders Index outperformed its parent index by 3.83% on a total return basis.

This outperformance has the potential to attract further inflows, creating a positive feedback loop. “We expect further increase in client demand for sustainable investments, given the attractive returns and resilience,” says Tellier. “Perhaps for the first time, people can invest according to their values without compromising on performance.”

Sceptics remain

But not all are convinced. Some analysts and investors are sceptical about companies “greenwashing” to improve their environmental credentials and attract ESG funds. Others argue that the outperformance of ESG indices is buoyed by the inclusion of high-growth technology stocks, and has little to do with ESG factors themselves.

Tellier takes a different perspective. “As more and more companies embrace sustainable strategies that benefit all stakeholders, from employees to communities, it stands to reason that they will align themselves with expectations from consumers and society, manage risk better and become more transparent. These should all be long-term growth drivers, as well as helping to ensure resilience in times of volatility.”

The next generation knows

Tellier says client activity in BNP Paribas Wealth Management business in Asia reflects this broader shift. “I am delighted to see an increased acceptance and understanding of sustainable and ESG investments among our clients,” he says.

And the next generation of UHNWI clients is clearly signalling that they see sustainability as critical to their businesses. “Half of the participants in our NextGen 2020 report are engaged with sustainability and impact investing, compared to 2019, when a third of family offices undertook sustainable investing and a quarter engaged in impact investing,” he points out.[6]

Some clients – many of them elite Asian entrepreneurs - have had a relationship with BNP Paribas Wealth Management for 30 or 40 years, and their children and grandchildren are bringing their expectations to the family business. Tellier says. “Demographics in Asia increasingly favour growing ESG awareness and commitment for both family businesses and family wealth management decisions.”

A root-and-branch approach

Acknowledging the complex and far-reaching nature of ESG financing and investment, BNP Paribas has embraced sustainability across its entire business. Tellier explains, “today, we have integrated sustainability in all our products and services rather than just offering a range of thematic funds to offer to our clients. We have the full spectrum of sustainable investment solutions ranging from funds, equities, bonds to sustainable DPM mandates. With these building blocks, we can design tailor-made solutions for clients.”

The bank has been involved with sustainable finance and investment since 2007 and its committed approach has been recognised in the industry. “We were named the most ESG responsible international bank 2019 at the Capital Finance International Awards,” says Tellier. “This is an endorsement of our long-term, root-and-branch approach to ESG and impact investing.”

This article was first published in the South China Morning Post.