High Returns and Qualified Impact: A Paradigm Shift in ESG Public Equities
Today’s investors want their money to align with their values, beyond the bottom-line. Between 2012–2018, total environmental, social, governance (ESG) assets under management have more than doubled, reaching over $30 trillion [1]. Incorporating ESG factors into investment decisions is becoming critical for long-term success, and this holds true for family office investing as well. ESG investments are favourable for family offices, given that ESG investments are typically less volatile over time, and family offices generally take on a longer-term investment strategy. According to UBS’s 2020 Global Family Office report, almost 60% of family offices surveyed stated that sustainable investing was necessary, and 39% are planning on incorporating more sustainable investments into their portfolios [2]. The push towards more sustainable and impactful investing is likely driven by a range of reasons: the push from Millennials and Gen Z, as for younger family members, aligning investments with family values is key; increased investor awareness into more impactful investing; and the development of innovative, high-yielding, technology-backed solutions.
There are many vehicles through which family offices can increase ESG investments in their portfolios, and green exchange-traded funds (ETFs) offer a way for investors to have a wider impact and reach. The two largest green ETFs, the Invesco Solar ETF (TAN) and the iShares Global Clean Energy ETF (ICLN), have been trading for over a decade, and remain a popular choice for ESG investing among family offices. 2020 was a particularly strong year for these products, with prices rallying and peaking earlier this year; since then, prices for ETFs have undergone significant corrections. However, these green ETFs have their limitations. Aside from being overvalued, ETFs fail to quantify the impact created by investors’ capital, making them difficult to categorize as impact investments. The potential for greenwashing also exists: a report by MSCI found that in the 20 largest ESG funds, 12 contained holdings in thermal coal, 15 in tobacco, and 12 in weapons [3]. This contradicts these funds as impact funds, and questions whether conventional ESG investing truly aligns with a family office’s values and principles to invest with more impact.
At True North, we aim to tackle the limitations of green ETFs and ESG funds with True Alpha, our proprietary algorithm for public equities, and offer family offices an impact-focused investment option. Companies that are impact-driven often behave differently than their conventional counterparts. Using a low-frequency and active investment strategy, True Alpha takes advantage of this behaviour to react and deliver quantifiable returns that have measurable impact. We bring impact front-and-centre to make it radically transparent, with quarterly quantification of carbon footprints and investors can expect water use, waste, and sustainable energy fraction on our development roadmap. Our product operates in six thematic investment areas, which align with our vision for a more sustainable future: energy-saving tech, transportation, renewable energy, clean water, circular economy, and plant-based food. Each of these themes has its own impact appetite, trading off between impact versus return versus volatility—allowing us to build tailored portfolios for different risk and impact thresholds according to each investor’s preferences. True Alpha continues to develop along two complementary directions: a technical analysis algorithm that constantly analyzes and learns from thirteen key technical financial indicators; and behavioural science measurement to analyze investor sentiment and buzz to make sense of the market.
Even in our beta phase, True Alpha has an established track record, out-performing benchmarks including S&P’s ESG MidCap 400 index, Blackrock’s ICLN, and the NASDAQ composite. We’re excited to bring impact to the forefront of public equities ESG trading with True Alpha.
For more information about True Alpha, please contact partner Kai Chen (kai@truenorthimpact.com).