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Investment Trends for Family Offices: The Growing Importance of ESG

May 17, 2023

Traditionally, many make investment decisions based on their ability to provide the greatest amount of tax savings. For example:

  • Purchase municipal state bonds which generate tax exempt interest
  • Focus on companies that pay qualified dividends subject to the lower tax rate 
  • Consider companies that issue qualified small business stock, which results in a special gain exclusion if certain qualifications are met.
  • Invest in qualified opportunity funds to defer gains and exclude appreciation if certain holding period requirements are met.

However, there are a multitude of factors to consider, in addition to tax implications, when determining how to invest.

Traditional factors include interest rates, credit rating, liquidity, and stock price volatility. Increasingly, information on how the company manages Environmental, Social, and Governance (ESG) risk plays a vital role in investment decisions. ESG investing is the systematic and explicit inclusion by investment managers of environmental, social, and governance factors into financial analysis. Although ESG investing has been around for decades, interest in this type of investment has grown exponentially in recent years.

Environment includes factors such as climate change, carbon emissions, deforestation, and water and air pollution. For instance, the extent to which manufacturing companies reduce the carbon emissions released as a result of their manufacturing processes is one way to measure the environmental impact.  

Social addresses the company’s impact when it comes to inclusion and diversity, labor rights, human capital, and wage equality. For example, during COVID there was a company that tackled a social issue by developing an online tool to provide mental health services to rural communities where there was limited access to psychologists and psychiatrists.

Governance refers to the company’s impact on corporate governance, ethics, tax transparency, and board composition. Companies that enforce independence checks and implement data protection measures are examples of positive governance.

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Alyssa Rausch

Alyssa Rausch is a Senior Tax Manager in the Private Client Services Group. She provides comprehensive tax compliance and advisory services to high net worth individuals, closely held businesses and their owners, S corporations and partnerships.

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