Parents often use philanthropy to emphasise a family’s core values and introduce their children to the concept of wealth management. However, getting the next generation involved in the family’s investment activities has proven to be much more difficult.
Sustainable investing can help change this dynamic. There is growing interest in the opportunities that sustainable investing brings in the Middle East.
It is notable that Cop27 will be held in Egypt in November 2022. This interest aligns with government initiatives such as the UAE announcing its intention to reach net zero by 2050.
Furthermore, value-based investing is not new to the Middle East: Sharia-compliant strategies are a prime example.
Young people are keen to consider the opportunities of making a positive impact with their wealth and to harness opportunities in renewable energy and sustainable food production.
Demonstrating how financial assets can be used responsibly to generate a profit and address social or environmental issues can spark a lifelong interest in investing for a generation eager to save the world.
The silver lining: parents don’t have to sacrifice investment returns to meet their children “where they are”, as was once widely presumed regarding sustainable investing.
Indeed, that myth has been dispelled: sustainable investing is an investment strategy that has matched traditional benchmarks.
Understanding the next generation
To deepen their children’s interest in investing, parents should understand their long-term financial goals and how investing can have an impact that is consistent with their children’s passions and the causes they care about.
Although some parents worry that incorporating sustainable investing would mean forgoing the competitive returns that their portfolio targets, in actuality, it appears that incorporating sustainable objectives will position their portfolio for sectors that are poised for growth, while still meeting their goals.
Additionally, it sets their children on the path to becoming informed investors.
Parents should also consider how they want their family to utilise their wealth and over how many generations. This entails considering the investment knowledge their children might need to effectively manage their resources.
Parents should also ask their children what other goals they would like their investments to pursue, besides financial gains, as well as inquire about their interests in current events and investment topics.
Driving positive change through investments
Young adults today realise that philanthropy is only one component of effecting positive change, and purposefully make concerted efforts to better the world through their day-to-day actions. This includes their voting preferences, travel plans, spending habits and investment approaches.
Introducing young adults to sustainable investing, an umbrella term used to describe investment strategies that incorporate financial as well as social and environmental objectives, can have a positive impact on them.
This can introduce them to the world of finance by focusing on issues and causes they care about, such as diversity, climate solutions, financial inclusion and education.
It can help them gain a deeper understanding of the asset management ecosystem, from the role of individual investors to the impact of institutional capital. And it can put the family’s core values into practice.
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Wide range of investment options
Sustainable investing incorporates a wide range of investment strategies and trends, including:
- Values-based investing: an investment approach that reflects the investors’ values by avoiding or increasing exposure to specific companies, industries or business practices
- ESG: an investment strategy in which consideration of environmental, social and governance factors is a vital role in implementation and portfolio construction investment decisions
- Thematic investing: investing in companies and funds that target specific themes or issues, such as water, clean energy and gender diversity
- Impact investing: invests in companies, organisations and funds that aim to generate positive, measurable social and/or environmental outcomes in addition to financial return
Diversifying portfolio performance
Sustainable investing is a long-term trend for the return-seeking investor, rather than a passing fad or a concession to the interests of Gen Z.
Adding sustainable investments to their portfolio may, in fact, enable investors to maximise portfolio returns, while lowering risk.
Sustainable investing does not necessitate a performance trade-off. Studies have shown that ESG factors, for example, improve portfolio returns by lowering volatility.
Moreover, sustainable investing can offer opportunities to invest in megatrends such as sustainable agriculture and electric vehicles, which have backing from a variety of stakeholders including governments, consumers, asset managers and businesses, and can present growth prospects.
Investors can also maintain their targets as they can include sustainable investing into an existing portfolio without altering its risk-return profile.
Finally, investors can make a difference as they can choose from a variety of environmental and social factors, including clean energy, racial equity and health and wellness, to name a few.
Amanda Lott is head of wealth planning strategy and Jessica Matthews is global head of sustainable investing at JP Morgan Private Bank