Impact investing and sustainability are front and centre for governments, asset owners and financial institutions who have mobilised in the fight to tackle environmental and social challenges.
Similarly, family offices are heeding the call and evidence suggests that Asian families are at the forefront of the impact investing trend and have been increasing their allocations to assets that create tangible social and sustainable benefits, while also generating positive returns.
Geoffrey Lam, managing director of Tsangs Group — an innovation-focused global family office —shed light on how family offices are fueling sustainable tech during AsianInvestor’s Family Office Impact Exchange 2022 on March 10.
Tsangs Group has been investing in the tech space for more than a decade, both through direct investment and in funds from other financial service providers, and have now made clean sustainable technology their primary focus for the foreseeable future.
“We like clean tech because we believe mankind is in danger — looking at the research, it estimates that in 8 years the global temperatures will rise by 1.5 degrees celsius if nothing changes,” said Lam.
“We are also seeing a lot great companies emerging in the green tech space, and we expect in the next five to ten years there will be a lot of unicorns and great opportunities in the clean technology sector.”
LIQUID AND ILLIQUID
According to Lam, Tsangs Group views clean tech investment as consisting of two areas — the liquid space and the illiquid space.
For liquid investments, Lam said that his firm plans to long the carbon price for the next five to ten years.
“The rationale is very simple because for all regulated carbon exchanges globally, there are set limits or a cap on the permits which will be reduced each year. As economies continues to grow, the demand will increase so the price will increase,” said Lam.
Despite carbon being a new asset class, over the past eight years it has had an annual return of 20% with a 15% to 20% standard deviation according to Lam.
“The most important thing is that carbon has a very low correlation to every major asset class whether that be stocks, bonds or commodities. Putting carbon in your portfolio provides a much better risk-adjusted return,” he said.
That being said, Lam admits that carbon can also be quite volatile, and suggests that those looking to allocate to the asset class might want to do so through a hedge fund or active manager.
On the illiquid side of the clean tech space, Tsangs group is pursuing private equity and project based opportunities. They tend to focus on early or seed stage opportunities and have made investments in companies developing technologies in hydrogen, carbon capture negative emissions, regenerative farming, enhanced battery storage and software to name a few.
“We generally don’t like to invest in the late stage of these projects as valuations tend to be too high and we find that the private asset price will continue to adjust down in the later stages of private equity deals.”
Along with the benefits of the green tech space, Lam says that investors need to be on the look out for red flags and do their due diligence to avoid greenwashed offerings.
“You really need to examine every offering's rationale and examine the implications of the technology being developed to learn whether the opportunity is real or just being packaged in a green wrapper,” said Lam.
Lam also advises a close examination of the people or companies behind any potential opportunities to avoid bad decisions.
“You need to look at the founders and the management and assess whether they really have the capabilities, background or experience in their field to assess their commitment to having a positive impact on society,” he said.
Lam believes firmly in the role that family offices can play through their innovation to drive more awareness and engagement of impact investing and ultimately have a positive effect on the environment and investment space.
“I think for all of us in this space, we should really do the work and support those companies who have real technology that can improve our society and environment,” said Lam.
As investors, Tsangs group tries to help all the companies in its portfolio to expand their business sustainably.
“If they are a Western company we will bring them to Asia and to China and help them expand to different areas, introduce them to strategic investors and local partners,” he said. “We will also advise them on how to be more ESG compliant and expand their reach to larger institutional clients on a bigger stage.”
This article has been updated to say that the annual return of carbon has been 20% due to a clarification made by the speaker.