ESG and alternative investments

The integration of ESG and alternative investments within asset allocation in Family Offices

There is a common saying about wealthy families: “It takes three generations to lose a family fortune”. But the curse of the third generation did not appear out of thin air. Because, for 70% of affluent families, it ends up becoming a reality1.

To avoid becoming a part of the statistic, many Family Offices have planned a long-term strategy for the preservation of capital. However, the increasingly volatile stock market presents a challenge. For these reasons, more Family Offices have integrated alternative investments, as well as environmental, social, and governmental (ESG) investing, into their portfolio.

Additionally, ESG and some alternative investments provide more value beyond being a stable asset class. It is also an opportunity to generate positive and measurable impact alongside attractive returns.

But diversifying a portfolio with ESG and alternative investments also increases the complexity – putting immense pressure on investment managers to keep an overall view over a larger amount of data.

ESG and alternative investments offer exciting new investment opportunities

The current stock market is characterised by elevated volatility, rising inflation, and responding interest rates. 

As alternative investments refer to assets outside of bonds, stocks, or cash, they have the potential to be a strategic instrument to balance a portfolio – pushing alternative investments to become a more important factor in investment portfolios.

The same diversification trend is seen within ESG investments. In the future, ESG will not be relegated to a minor corner of the international investment scene. According to Bloomberg Intelligence Global, ESG assets are on track to reach $53 trillion by 20252.

Considering this, it is no wonder that ESG and alternative investments are growing megatrends in financial markets – they present an opportunity for significant benefits for Family Offices.

Why consider ESG and alternative investments?

  • 1. Balance the portfolio with alternative assets

    Alternative investments and ESG are most often more stable assets since they potentially have a lower correlation with traditional asset classes. As such, with alternative investments you can protect investors against capital loss and instead generate more stable and reliable returns.

  • 2. Combat a volatile stock market by diversifying assets

    To withstand a volatile stock market, it is necessary to diversify the investment portfolio. Alternative investments are assets outside of the traditional stock market. As such, they are not traded on a public market which to some extent can protect the investment from market fluctuations. It is important to note that this also makes the assets less liquid. For this reason, they typically have longer investment timelines that are suitable for the part of the portfolio dedicated to the preservation of capital.

  • 3. Generate a positive impact in addition to financial returns

    The rising trend of ESG and alternative investing can generate more than profit. It is an opportunity to invest in projects or ideas with the intention of generating a significant and measurable positive social and environmental impact. Impact investments offer a unique opportunity for Family Offices to showcase the family’s values. Not only does this open the opportunity to do good in addition to turning a profit, but it is also a valuable tool in enhancing the public perception of the Family Office.

Diversity increases the complexity of the investment strategy

It can be especially difficult to value alternative investments, as they are not traded on the traditional stock market – yet the correlation to the stock market is there in various degrees. 

Therefore, to keep track of your overall portfolio value and commitments you most often need to be able to price and benchmark your alternatives to keep track of the market value. In addition, you normally enter alternative investments early, and as such, the investment risks are uncertain. Making the risk involved relatively high for these investments and heightening the complexity of the portfolio. 

Another significant difference between alternative investments and stocks is how you need to manage them. 

In an alternative investment, you typically promise to invest a specific sum, but you do not invest the entirety upfront. However, the rest of the funds still need to be available in case of a capital call. Since we are talking about significant funds, they need to be invested elsewhere until a draw down. If they are left in a savings account, low interest rates and inflation will slowly lower the value. 

Even though diversifying the Family Office’s funds might protect the preservation of capital, the higher complexity makes it harder for the Family Office to keep an overview of the investments.

A consolidated data overview is the foundation for managing increasingly complex investment portfolios

As investing in ESG and alternatives increases investment complexity, they also raise issues concerning governance and reporting.

Something that presents a struggle for many Family Offices. 

Access to accurate and complete data makes it possible to easily calculate the value and exposure of active asset classes as well as potential investment scenarios. 

However, with the integration of ESG and alternative investments, it is no longer enough to showcase exposure and returns. The environmental or social impact of the investment must be presented as well – making data control increasingly important when managing a Family Office.

PORTMAN – an automated and complete front-to-back solution for your investment environment

Are ESG and alternative investments important components of your future investment strategy? 

Our PORTMAN solution is a recognised investment management solution that meets professional requirements for portfolio and risk management. 

We understand the complexity, and we will help you streamline it with our PORTMAN solution, built of separate modules, so you can customise your setup to stay secure for all future requirements and complexities. With us, you only subscribe to the modules you need for the next step of your business expansion and protection.

Shall we talk about the possibilities?