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Next generation behind family offices’ ESG push

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In 2017 when Josh Tanenbaum joined the Polonsky Foundation, his stepfather’s namesake family office, he wanted to diversify its portfolio to include more investments that made a positive social impact.

Unlike most family offices, the Polonsky Foundation is purely philanthropic — its investment returns do not go into family pockets but fund projects supporting the arts, humanities and cultural heritage. But while its outcomes are for the greater good, the social good that could be achieved through the investments themselves is not an active consideration.

Mr Tanenbaum, who had always been inspired by the human rights activism shown by his parents (his father died seven weeks before he was born), set up his own impact venture capital business in 2016. The firm, Clearstone, invests in tech start-ups that aid social mobility, and Mr Tanenbaum was keen to bring similar investments to the Foundation.

“Typically the next generation takes one of two routes, which is fight or flight,” the 28-year-old says.

In the next few decades, trillions of dollars are expected to be transferred between generations in the US alone, placing wealth in the control of millennials, who are leading the charge for impact investments as well as those that meet environmental, social and governance (ESG) criteria.

But while a 2019 survey by financial services group Allianz found that 64 per cent of millennials are likely to make investment decisions based on societal problems that are important to them, Swiss bank UBS warned in its 2020 global family office report that “the move towards sustainable investing [encompassing both ESG and impact investing] should not be overstated”.

The UBS report, which surveyed 121 of the world’s largest single family offices worth an average $1.6bn each, found that while almost two-thirds of families regard sustainable investing as important for their legacies, it was “unclear whether good intentions will turn into reality”.

“There’s a lot of hype,” says Eugenia Koh, head of sustainable investing at Standard Chartered Bank. “[Impact and ESG investing] has not really reached a tipping point yet. It might have from an institutional perspective, but from a private wealth or family office perspective it’s still growing momentum.”

Mr Tanenbaum says recognising this reality has been vital in his approach at the Foundation, where he presents impact investments as key to strengthening the portfolio’s diversification, as well as delivering solid financial returns. 

“We still have a way to go to turn folks into believers, so it’s still a finance-first argument at this juncture,” he says. “If you start the conversation with a finance argument you can kind of leave the Trojan horse to work for itself.”

Jessica Hodges, head of family office audit and assurance at Deloitte UK, says this argument is used by many next gen pushing ESG investments in their family offices, as there is growing evidence that such funds outperform their peers. In 2019, nine of the biggest ESG mutual funds in the US outperformed the S&P 500. Ms Hodges says that while she has clients on “both sides of the spectrum” in their attitude towards ESG investing, they are “definitely still primarily focused on profit-making”.

“I’ve got families who will say all the right things, and then they get a really good investment opportunity and it doesn’t meet all of their potential ESG requirements, but because . . . they haven’t got to report to anyone, they’ll do it anyway,” she says.

Exclusionary policies, where families reject investments that do not meet their values, are an alternative to the active selection of ESG funds or impact investment projects, which aim to produce a measurable social or environmental impact alongside a financial return.

For example, a family office that wants to limit global warming might choose to exclude from its portfolio any company that derives more than 50 per cent of its revenue from carbon-intensive coal — an easier option than finding a company with specific goals to increase the development of sustainable energy. 

According to the UBS 2020 global family office report, 39 per cent of family offices intend their portfolios to be sustainable in five years’ time, but mainly through exclusionary policies.

For those with an active approach, there is demand for specialist investment advisers. “Young people are asking ‘who is our wealth adviser and what are their capabilities?’ So now you have this tension with wealth advisers who are desperate to find products that are suitable,” Mr Tanenbaum says.

Ms Hodges adds: “Often there will be a very old, trusted adviser, a friend often very close to the patriarch. But you now might see them bringing in a younger ‘next-gen’ adviser.”



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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European markets recover after tech stock fall

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European equities rebounded from falls in the previous session, when fears of a US interest rate rise sent shares tumbling in a broad decline led by technology stocks.

The Stoxx 600 index gained 1.3 per cent in early dealings, almost erasing losses incurred on Tuesday. The UK’s FTSE 100 gained 1 per cent.

Treasury secretary Janet Yellen said at an event on Tuesday that rock-bottom US interest rates might have to rise to stop the rapidly recovering economy overheating, causing markets to fall.

Yellen then clarified her remarks later in the day, saying she did not think there was “going to be an inflationary problem” and that she appreciated the independence of the US central bank.

Investors had also banked gains from technology shares on Tuesday, after a strong run of quarterly results from the sector underscored how it had benefited from coronavirus lockdowns. Apple fell by 3.5 per cent, the most since January, losing another 0.2 per cent in after-hours trading.

Didier Rabattu, head of equities at Lombard Odier, said that while investors were cooling on the tech sector, a rebound in global growth at the same time as the cost of capital remained ultra-low would continue to support stock markets in general.

“I’m seeing a healthy correction [in tech] and people taking their profits,” he said. “Investors want to be much more exposed to reflation and the reopening trades, so they are getting out of lockdown stocks and into companies that benefit from normal life resuming.”

Basic materials and energy businesses were the best performers on the Stoxx on Tuesday morning, while investors continued to sell out of pandemic winners such as online food providers Delivery Hero and HelloFresh.

Futures markets signalled technology shares were unlikely to recover when New York trading begins on Wednesday. Contracts that bet on the direction of the top 100 stocks on the technology and growth-focused Nasdaq Composite added 0.2 per cent.

Those on the broader S&P 500 index, which also has a large concentration of tech shares, gained 0.3 per cent.

Franziska Palmas, of Capital Economics, argued that European stock markets would probably do better than the US counterparts this year as eurozone governments expand their vaccination drives.

“While a lot of good news on the economy appears to be already discounted in the US, we suspect this may not be the case in the eurozone,” she said.

Brent crude, the international oil benchmark, was on course for its third day of gains, adding 0.7 per cent to $69.34 a barrel.

Despite surging coronavirus infections in India, the world’s third-largest oil importer, “oil prices have moved higher on growing vaccination numbers in developed markets”, said Bank of America commodity strategist Francisco Blanch.

Government debt markets were subdued on Wednesday morning as investors weighed up Yellen’s comments with a pledge last week by Federal Reserve chair Jay Powell that the central bank was a long way from withdrawing its support for financial markets.

The yield on the 10-year US Treasury bond, which moves inversely to its price, added 0.01 of a percentage point to 1.605 per cent.

The dollar, as measured against a basket of trading partners’ currencies, gained 0.2 per cent to its strongest in almost a month.

The euro lost 0.2 per cent against the dollar to purchase $1.199.



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Yellen says rates may have to rise to prevent ‘overheating’

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US Treasury secretary Janet Yellen warned on Tuesday that interest rates may need to rise to keep the US economy from overheating, comments that exacerbated a sell-off in technology stocks.

The former Federal Reserve chair made the remarks in the context of the Biden administration’s plans for $4tn of infrastructure and welfare spending, on top of several rounds of economic stimulus because of the pandemic.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said at an event hosted by The Atlantic magazine.

“So it could cause some very modest increases in interest rates to get that reallocation. But these are investments our economy needs to be competitive and to be productive.”

Investors and economists have been hotly debating whether the trillions of dollars of extra federal spending, combined with the rapid vaccination rollout, will cause a jolt of inflation. The debate comes as stimulus cheques sent to consumers contribute to a market rally that has lifted equities to record levels.

Jay Powell, the Fed chair, has said that he believes inflation will only be “transitory”; the central bank has promised to stick firmly to an ultra-loose monetary policy until substantially more progress has been made in the economic recovery.

The possibility of interest rates rising has been a risk flagged by many investors since Joe Biden’s US presidential victory, even as markets have continued to rally.

Yellen’s comments added extra pressure to shares of high-growth companies, whose future earnings look relatively less valuable when rates are higher and which had already fallen sharply early in Tuesday’s trading session. The tech-heavy Nasdaq Composite was down 2.8 per cent at noon in New York, while the benchmark S&P 500 was 1.4 per cent lower.

Market interest rates, however, were little changed after the remarks, with the yield on the 10-year Treasury at 1.59 per cent. Yellen recently insisted that the US stimulus bill and plans for more massive government investment in the economy were unlikely to trigger an unhealthy jump in inflation. The US treasury secretary also expressed confidence that if inflation were to rise more persistently than expected, the Federal Reserve had the “tools” to deal with it.

Treasury secretaries generally do not opine on specific monetary policy actions, which are the purview of the Fed. The Fed chair generally refrains from commenting on US policy towards the dollar, which is considered the prerogative of the Treasury secretary.

Yellen’s comments at the Atlantic event were taped on Monday — and she used the opportunity to make the case that Biden’s spending plans would address structural deficiencies that have afflicted the US economy for a long time.

Biden plans to pump more government investment into infrastructure, child care spending, manufacturing subsidies and green energy, to tackle a swath of issues ranging from climate change to income and racial disparities.

“We’ve gone for way too long letting long-term problems fester in our economy,” she said.



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