Michael Au needs to prove a point to the most important people in his life. He must demonstrate to his family office that sustainable finance principles are the same values his family has held for years, but in a new language and exercised using this generation’s investment strategies.
Michael Au was enjoying a successful career in art and wine trading when a family event pulled him into the management of his family’s multi-generational business. Amid a challenging reorganisation of their real estate and investment portfolio he realised that sustainable finance and impact investing were ways to generate value while also creating positive change. Now he just needs to convince his family.
The process began with some tough questions.
“I had to distill the family’s investment process and find out what the business meant for each family member and various stakeholders including employees. I asked what, why, and how things had been done in the family business by the previous generations.”
The process involved several generations, with Michael’s uncles and aunties playing an important, but passive, role in investment decisions. The difficulty and emotion triggered by the exercise brought Michael, 36, much closer to his father and the wider family.
“This process engaged the family in a different way and opened lines of dialogue that we’d never had before. We spoke about what our purpose and vision for the family wealth were, and what it means for family legacy and our community.”
Influencing the Family
Most of the family had never seriously explored sustainable finance, impact investing, Environmental, Social and Governance (ESG), and all the other core terms and concepts of this new way of asset management. They repeated the common criticism that impact investing is neither as effective as philanthropy nor as profitable as a traditional investment strategy.
“The popular misconception is that you trade good returns for doing good. In reality, the trade-off is that in order to get good returns you have to spend additional time to design the impact investment programme because the impact factor is harder to measure and due diligence is more important.”
As Michael learned more about his family’s investing habits he saw both commonalities and differences between what they had always done with the new investment strategies he was embracing.
“The important concepts around ESG are what we have always believed in and practiced in the family business to ensure long-term success; it has just been expressed in a different language.”
Michael is using the Toniic impact portfolio tool to track his work and generate the hard numbers he needs to demonstrate his success to his family.
“I’m using those results in a sort of soft sell approach. I hope this will tell the full story and persuade them to come aboard.”
The key to Michael’s success will be his ability to share his journey and discoveries with the entire family. Michael realised the importance of this after attending the 2018 Global Impact Investing Network (GIIN) summit in Paris. He was filled with ambition and optimism generated by the conference and he told a family member, who had been very supportive of his journey, that he wanted to put some personal savings into a particular impact fund he had just discovered.
“They said it was fine if I wanted to test impact investing with the family money, but not to do it with personal savings — that was just too risky. I realized that I had spent so much time learning about the best practices of the sustainable finance industry that I had neglected to share my journey with the most important stakeholders to ease them on board.”
Perfecting the Methods
Michael’s family is willing to listen to his ideas. They created an investment sandbox and allocated a small amount of assets to a trial portfolio. Persuading the family to invest more of its assets in a sustainable way depends largely on the success of this trial portfolio. It is managed by Michael’s new firm District Capital, founded as the sustainable finance arm of the family office.
“All of the investments we make are impact assessed and measured. I bring those concepts with me when attending joint assessment sessions with other investments made by the family office at large. We have to manage and echo the financial risks and return profiles of the asset classes which overlap with the family portfolio. The impact, no matter how deep, will need to be presented as sugar on top. I must demonstrate my focus on wealth preservation while offering social and environmental benefits.”
Michael is particularly interested in impact investing.
“I define impact investment as resource deployment made to affect measurable socio-economical and, or, environmental changes, while holding that deployment and management of returns and sustainability to the same level of scrutiny, if not even more, than a purely profit-driven financial investment.”
So far, most of his activity has been in the form of direct investments, but he has also invested in private equity funds and is in the early stages of developing a fixed income and listed equity strategy curated with an impact lens.
“A key focus is the ability to track indices, as that is one of the investment strategies the family has agreed to embrace, but there are problems with simply applying a negative screen to an index tracker, as you create tracking errors, which defeats the whole purpose of an index fund. Various fund managers offer different ways of factoring in negative screens, but we’re not completely convinced by any of them just yet.”
One of Michael’s investment focuses is human empowerment through reducing inequality and promoting affordable healthcare and education. He has just participated in a Series C funding round for Jumbotail, an Indian online platform that organises the food and grocery ecosystem in Bangalore, to aggregate demand and increase the bargaining power of Mom and Pop shops, which serve as de facto community centres. He is also collaborating with the HKSAR Government on the first Hong Kong Social Impact Bonds (SIBs), as both an advisor and as an investor.
“I have to prove the worthiness of my ideas, demonstrate deliverables and that I’m making money on sustainable investments, and show that we’re also having a significant impact. We have to check those boxes before we can change the entire family portfolio.”