Setting New Benchmarks in ESG Investing: Delivering High Returns with Quantified Impact
Last month, we had the pleasure of speaking at the Family Office Forum in London, put on by Prestel & Partner. With over 100 Family Offices in attendance, the Forum is one of the world’s largest conferences to learn and share governance and investment best practices. True North Partner and Fund Manager, Kai Chen, spoke on Making Money while Doing Good, and how True North is setting new benchmarks in ESG investing, delivering high returns with quantified impact.
Environmental, Social, and Governance (ESG) assets are the fastest growing asset-class, with growth accelerating since the start of the pandemic [1]. While many options exist for the impact-minded investor looking to invest sustainably, equities remain the most popular vehicle to do so, worth over USD $53 trillion [2].
Despite growing global interest and traction, impact investing still faces challenges.
Products marketed as ESG do not always generate the positive impact that they promise.
This greenwashing of ESG products results in investors being misled about the positive impact of their dollars. InfluenceMap, a London-based non-profit found that 55% of funds marketed as low-carbon and green energy exaggerated their environmental claims, and more than 70% of funds fell short of their advertised ESG targets [3]. ESG policies on exclusions and inclusions vary substantially throughout the industry, and not all funds are created equal: holdings in firearms, thermal coal and even nuclear weapons are included in iShares’ ESG Aware MSCI USA ETF, Nordea 1 - Global Climate and Environment, and the Vanguard FTSE Social Index, respectively. Evidently, there is room for improvement, and this sentiment is echoed by investors themselves. In a 2020 study by Global Impact Investing Network (GIIN), 83% of investors indicated the importance for better tools to strengthen impact screening and advance impact measurement practices [4].
There is a need for high-impact deals that don’t sacrifice financial returns.
Mainstream ESG public equities products on the market today do not perform as well the market: since November 2020, NASDAQ saw 37.9% performance, while ICLN trailed behind at 13.3%. The mere existence of these funds is evidence that sustainability is indeed an investable theme in the marketplace– existing products do not capitalize on it. Last year, we began beta-testing True Alpha, our ESG public equities trading algorithm. Testing completed last month, and we’ve seen 29% performance year-to-date– 64% since testing began in November 2020. Along with strong financial returns, True Alpha is impact-centred, reporting CO2 footprint savings per $10,000 USD invested.
There is a lack of product diversity in ESG public equities.
When it comes to sustainability, there is not enough product diversity for listed public equities. iShares’ ESG Aware MSCI USA and EM ETFs, the Vanguard FTSE Social Index, and Parnassus Core Equity have roughly the same mix of sector exposure across Information Tech (20-30%) Communication Services (9-11%), and Materials (2-6%) in their holdings, to name a few. There is a need for equities products that specialize in sustainable investment themes, to give investors choice when it comes to investing their dollars. With True Alpha, we’ve sourced a trading universe according to six thematic impact areas, each with its own return and impact profile: Energy-Saving Technology, Transportation of the Future, Renewable Energy, Clean Water & Oceans, Circular Economy, and Plat-Based Food.
The Covid-19 pandemic has highlighted the need to invest sustainably into our businesses, societies, and health systems, in order to make them more resilient. To do this, we need a better understanding of what it means to be sustainable, through more impactful examples. At True North, it is our mission to tackle these grand challenges of tomorrow.
Thank you to Prestel & Partner for hosting us at their London Family Office Forum.
To learn more about True Alpha and True North’s mission to invest with impact, please contact partner Kai Chen (kai@truenorthimpact.com).