Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How the Ultra-Wealthy Use ESG Investing for Impact and Returns
Transcript
- Lucas: Let me start with a specific number. A single-family office we've been tracking—manages about three billion dollars—recently disclosed that over the past five years, they shifted 40 percent of their public equity allocation into esg focused funds. The result? They outperformed their traditional benchmark by 60 basis points annually. Not a sacrifice of returns for values—the opposite. Luna: Sixty basis points is meaningful at that scale. That's eighteen million dollars a year in extra return on the shifted portion alone. And I think a lot of our listeners still assume ESG means lower returns or some kind of charitable gesture. Lucas: Right, and that assumption is exactly what the data has been dismantling. We'll get into the mechanics, but the key is that this family office didn't just screen out oil and gas. They took an active approach: carbon footprint screening, board diversity mandates, and direct engagement with portfolio companies on governance issues. The alpha came from reducing exposure to regulatory risk and management missteps. Luna: So it's less about excluding bad actors and more about rewarding companies that are managing future risks better. That makes sense. But how do they verify that a fund is actually doing what it claims? Greenwashing is a real concern. Lucas: Huge concern. This family office uses third-party impact verification from firms that specialize in carbon accounting and social audits. They also require quarterly impact reports that go beyond the standard PR. One thing they look for is alignment between a fund's proxy voting record and its stated ESG policy—if a fund says it prioritizes board diversity but votes against diverse slates, that's a red flag. Luna: That is such a practical check. Let's talk about the specific asset classes where ESG is showing up for ultra-wealthy families. You mentioned public equities, but I've seen a lot of interest in private markets too. Lucas: Absolutely. Private equity, real assets, and even direct investments. One example: a timberland investment—500 million dollars—that not only sequesters carbon but generates about 8 percent annual returns through sustainable harvesting and carbon credit sales. The carbon credits alone add a couple of percentage points to the return. Luna: That's a double win—environmental impact and a nice yield enhancement. And there's a tax angle too, isn't there? I'm thinking of Qualified Opportunity Zones. Lucas: Exactly the thread I was about to pull. Qualified Opportunity Zones, or QOZs, allow investors to defer capital gains taxes by putting that money into designated low-income communities. Many of those projects are built around green infrastructure—solar farms, energy-efficient housing. So you get tax deferral, potential appreciation, and measurable social impact. The Treasury Department has certified over 8,700 QOZs, and a growing share of the capital flowing in is esg tagged. Luna: And the deferral period is through 2026 for gains that were already realized, but new gains can still be rolled in. That makes it a live strategy right now. Lucas: Correct. If our listeners are sitting on unrealized gains—maybe from a business sale or crypto—they should be looking at QOZs before year-end. But back to the broader point: ESG isn't a single strategy. It's a toolkit. Screening, engagement, impact investing, tax-advantaged structures—each has different risk-return profiles. Luna: And different levels of liquidity. Timberland and QOZs are long-duration bets. Public equity ESG funds are daily liquid. So the allocation really depends on the family's time horizon and cash-flow needs. Lucas: Right. And the ultra-wealthy have the advantage of being able to build a dedicated team or hire an outsourced CIO to manage these complexities. For smaller investors, there are ETF solutions, but they lack the customization that family offices get. Luna: One thing I want to push back on: is there a risk that ESG becomes a crowded trade? If everyone piles in, could valuations get disconnected from fundamentals? Lucas: It's a valid concern. In 2020 and 2021, we saw massive inflows into ESG funds, and some stocks—like Tesla—traded at multiples that reflected that demand. But the family office we mentioned didn't just buy popular ESG names. They did deep analysis on which companies had genuine operational improvements. The outperformance came from stock selection, not a broad ESG label. Luna: So the lesson is: rigorous due diligence, not just following the marketing. That's a theme we've come back to on this show many times. Lucas: It is. And speaking of due diligence, there's a governance angle that's particularly relevant for family offices. Board diversity isn't just about optics—it's correlated with better decision-making and lower volatility. Studies show that companies with at least three women on the board have higher return on equity and lower stock price volatility. Luna: And the ultra-wealthy can influence that through their direct holdings and fund mandates. If a family office controls a significant stake in a private company, they can push for board changes. Lucas: Exactly. And that engagement is where the real impact happens. We saw a case where a family office with a 15 percent stake in a manufacturing firm got them to set net-zero targets by 2035, which led to energy-efficiency savings that boosted margins. Luna: That's a great example of the 'G' in ESG driving financial returns. Let's talk about measurement—how do families track whether their ESG investments are actually delivering on impact? Is there a standard metric? Lucas: No single standard yet, which is part of the challenge. But many family offices use the SASB framework—Sustainability Accounting Standards Board—for materiality. They also look at carbon intensity per dollar of revenue, gender pay equity ratios, and tax transparency. The key is to pick a few metrics that align with the family's values and track them consistently. Luna: And compare to benchmarks. If a fund says it has a lower carbon footprint than the S&P 500, you want to verify that independently. Lucas: Right. And the verification piece is critical. We've seen funds that claim ESG alignment but actually hold significant positions in fossil fuel companies, just because they have a 'light' screen. That's why the family office we mentioned does its own shadow analysis using data from firms like MSCI and Sustainalytics. Luna: So a lot of work, but potentially worth it if you're getting both impact and performance. Lucas, if our listeners take away one concrete step from this episode, what should it be? Lucas: I'd say: review your current portfolio's proxy voting record. See if your fund managers are voting in line with your stated values on environmental and social resolutions. That's a simple check that can reveal misalignment. And then, if you like what you're hearing today and it's helping you think about your own strategy, there's a simple way to make sure we can keep having these ad-free conversations. It's buy me a coffee dot com slash fexingo. No pressure, just a way to support the show if it's useful to you. Luna: Yeah, that's exactly how we keep it independent and focused on what matters to you. And we appreciate every listener who chips in. Lucas: So back to the practical: once you've checked proxy voting, the next step is to look at sector exposure. Are you overweight in industries that face regulatory headwinds from climate policy? That's a risk many families are now actively managing through their ESG lens. Luna: And that ties back to the return story—it's not just ideology, it's risk-adjusted returns. Which is why we're seeing more and more single-family offices hire dedicated ESG officers. Lucas: Exactly. According to a 2025 survey by the Family Office Exchange, about 30 percent of family offices now have a dedicated ESG staff role, up from 12 percent in 2020. That's a significant shift in resource allocation. Luna: And those are the offices that are likely to capture the alpha we talked about. Because they're not just screening—they're engaging, measuring, and adjusting. Lucas: Precisely. And one more thing: many families are using ESG as a way to align the next generation with the family's wealth purpose. Younger family members often care deeply about climate and social issues, and involving them in impact investment decisions can be a powerful engagement tool. Luna: That's a nice way to bridge generational differences. Instead of arguing about spending, they can co-invest in something meaningful. Lucas: Exactly. So whether it's financial returns, risk management, or family cohesion, ESG is proving to be more than a trend. It's becoming a core part of how the ultra-wealthy manage their capital. Luna: And we'll keep tracking how it evolves. Thanks, Lucas. Lucas: Thanks, Luna. That's it for this episode of The High Net Worth Podcast.