HONG KONG (BLOOMBERG) - As markets tumbled this year, Mary Ann Tsao faced a tough choice. Her fourth-generation family office in Singapore had adopted sustainable investing principles, but the coronavirus was trashing the global economy. Relatives suggested a return to the old ways.

"They'd say 'don't lose any money - never mind about the ESG (environmental, social and corporate governance)','" she said. "But we have to ask: what is the purpose of investing money in the first place?"

In a sign of how Asia's ultra-rich family offices are slowly embracing the sustainability trend, the Tsao Family Office has tried to stay the course, buying into the Brown Advisory US Sustainable Growth Fund and adding to its investment in the Robeco Sustainable European Stars Fund after the pandemic began.

For sustainable investing to take hold in Asia as it's started to in Europe and North America, family offices like Tsao's are key. Families run 85 per cent of the businesses in Asia, according to Ernst & Young estimates, a much higher proportion than the rest of the world. As fortunes get passed on to next generations, the push to do well by doing good is gathering steam.

"Family-owned companies within an Asian perspective are much more significant for local economies than they are in Europe or in the US," said Eugene Klerk, the global head of environmental, social and governance research at Credit Suisse Group in London.

Debates like the Tsaos are having are taking place over the virtual dinner tables of many tycoon families and could help shape the future of ESG investment, which exceeds US$30 trillion (S$40.9 trillion) globally. While sustainable investing has been gaining traction, Covid-19 forced many families to make stark choices: funnel money into operating businesses to prevent collapse, revert to tried and true investments or stay the green course.

For the Tsaos, whose wealth was generated by shipping lines that connect the globe, adopting ESG investing came after lengthy discussions with family members from the US and Japan to China. The family office runs part of the fortune created by Mary Ann's father Frank Tsao and his International Maritime Carriers, which eventually became IMC Group.

As part of the push, its offloading some factories in China that no longer fit the criteria and backed an impact investment for a wellness retreat in China founded by a family member. It also provided cornerstone capital to the Wellington Global Impact Bond Fund and the Invesco US Senior Loan ESG Fund.

Among super-wealthy families, much of the change has been driven by the next wave of heirs - especially millennials and women - who are trying to re-align family wealth with their personal interests and social values, said Peter Golovsky, who heads up IQ-EQ's Asia private wealth team from Hong Kong.

In Asia "you've got 2,000 families with more than US$500 million transitioning from one generation to the next in the next 10 years," he said. "It'll create a fundamental shift in the way they invest the future legacies and investments on behalf of those families."

Mr Golovsky relates the story of a private equity client that approached an Asian family for money, only to have the tables turned. They were asked instead to create an ESG fund focused on social infrastructure and technology that improves clean water and agriculture. Once that was started, other families joined to make it a US$500 million vehicle. It's a strategy the Tsaos have also used.

"It shows the influence of what families and family offices can be doing in driving specific outcomes," he said.

LOCKDOWN EFFECT

Other family offices are targeting their operating companies for change. Ishk Tolaram Foundation executive director Sumitra Aswani, a fourth-generation heir whose billionaire family expanded a tailor shop in Indonesia into the Tolaram Group, installed combined heat and power systems at its Estonian paper operations. It's also adopted solar hybrid technologies at a Nigerian noodle factory and integrated ESG overlays to its family office investments at Maitri Asset Management. There are no plans to change course despite Covid-19.

Not everything comes with consensus. Ms Aswani had some concerns when Tolaram ramped up its production of palm oil - an industry long criticized for its environmental and labor conditions - so she spoke with the company to ensure it was run with best practices. Ultimately, she said, it was better to produce in a responsible way than buy it from questionable sources.

VINDICATION

So far, much of the evidence shows that investors who stuck by ESG funds this year have benefited. In June, Morningstar reported that the majority of Europe-domiciled sustainable funds it tracked had outperformed their old-school peers over multiple time horizons and generally held up better than their traditional counterparts during the sell off.

And stocks with high environmental, social and corporate governance scores have outperformed the broader market and traded at higher valuations this year, according to Bank of America Corp. Storebrand Asset Management, a US$90 billion Norwegian fund that specializes in sustainable investing, says demand for green bonds is now so far ahead of supply that potential buyers might soon start to walk away.

Rich investors are taking note. Mario Knoepfel, head of sustainable and impact investing advisory for Asia Pacific at UBS Group, said the bank's 100 per cent sustainable portfolio assets in the region more than tripled to US$1.5 billion in July, from US$405 million in January 2019. The number of Asia Pacific private banking and wealth management clients engaged in the portfolio rose by 50 per cent in the first seven months of the year.

North-East Family Office Managing Director Mette Ekeroth, whose employer is based in Denmark and Singapore and manages the wealth of Pandora AS's founders Winnie Liljeborg and Per Algot Enevoldsen, said Covid-19 has supported their long-term thesis on sustainable investing. When they sensed the market was overvalued, they cut their overall equity exposure, focusing on healthcare and technology to generate strong returns this year.

The gains allowed the firm, which manages about US$3 billion and whose founders had close ties to Thailand, make more impact investments with the blessing of family members who check in every week for two-hour calls.

"This is a journey we've only just begun," she said, adding that the pandemic had acted as a beacon for the space. "It's highlighted a fragility in the financial system but also highlighted fragility in society."

Still, the family office embrace of ESG investing is far from universal. According to this year's UBS Global Family Office report, surveyed clients had just 9 per cent of assets allocated into investments with ESG principles, with a plan to increase this to 19 per cent over five years.

The same UBS survey of 121 family offices, including some of the world's wealthiest, found that incoming heirs of dynasties prioritize financial returns over sustainable, do-good strategies just as much as the previous generation.

The jury is also out on whether ESG stocks were true havens during the Covid crash, or if some funds just got lucky. By excluding fossil fuel and gambling stocks, many embraced technology and healthcare by default - two sectors that have done well. Researchers led by Elizabeth Demers at the University of Waterloo in Canada said ESG was negatively associated with returns as the markets bounced back in the second quarter.

One Singapore-based family office principal, who declined to be identified, isn't buying the green hype. He said his primary goal remains generating returns, with charitable aims addressed through philanthropy. He cited legal investments ranging from marijuana stocks to alcohol producers as businesses he's open to backing but might fail the ESG test.

For the Tsao family, sustainable investing is here to stay. Mary Ann Tsao hears the same commitment from others in the Family Business Network Asia, the local chapter of a hub that links thousands of peers around the world.

"There's a general desire to do better for the community," said Ms Tsao. "It's a signal that Asia has matured."