TruValue Labs Case Study
Veriti Management sums up its mission with a concise tagline: “Built to do good.” The Boston-based asset management firm focuses on faith-and values-based investing driven by environmental, social and governance (ESG) factors and the UN’s Sustainable Development Goals.
“Veriti is all about trying to bring socially responsible investing to institutions,” explains Dennis Hammond, the firm’s Head of Institutional Investments. More specifically, Veriti offers its clients, which includes foundations and endowments, a vehicle for aligning their investments with their values and missions. “Every portfolio tells a story,” Dennis explains. “If your foundation is about helping kids in developing countries, but your portfolio holds stocks of companies known to engage in child labor, then your portfolio is telling a very different story from your mission statement.”
Veriti creates customized portfolios for clients that mirror the performance of popular benchmarks like the S&P500, but are devoid of stocks that conflict with each client’s values. “We believe If you’re going to invest with passive managers–and you should–you should at least do so responsibly,” Dennis says. “Rather than compiling a portfolio agnostically, a passive collection of stocks should be compiled with a notion of what’s important to you from a mission perspective.”TruValue Platform from TruValue Labs™ figures prominently in the construction and maintenance of Veriti’s socially responsible portfolios. “TruValueLabs provides the ESG data that enables us to build a portfolio that behaves like a benchmark but is mission aligned,” says Dennis.
Every portfolio tells a story… If your foundation is about helping kids in developing countries, but your portfolio holds stocks of companies known to engage in child labor, then your portfolio is telling a very different story from your mission statement.
Values Driven
As a specialist in socially responsible investing (SRI), Veriti believed that self-reported corporate data at infrequent intervals did not provide a complete picture of responsible behavior. The firm needed a means of collecting objective, up-to-date data to augment its research.
TruValue Platform
The Platform scores ESG behavior in near-realtime to provide a check on assessments from conventional datasources. It enables construction of portfolios that mirror benchmark index fund performance without including stocks that don’t meet clients’ SRI criteria. It also allows monitoring of portfolios for adherence with automatic alerts of stocks falling below designated ESG thresholds.
Real-Time, Objective Data
TruValue Platform scans over 100,000 alternative data sources, using natural language processing (NLP) and artificial intelligence to track information on public and private companies and score their ESG behavior in near-real time.“The value of TruValue Labs for us is that, unlike other ESG data providers, it is up to the minute,” saysDennis.“We have other sources of ESG data, which we think are critical to our work, but they alone are not sufficient to give as robust a picture of corporate responsibility as we would like to have. The problem with traditional ESG data is that it is self-reported, sometimes at extended intervals,” Dennis points out. “When the most recent data we have on a company is six or 12 months old, that’s just not acceptable. Using the TruValue Platform in conjunction with self-reported data gives us a better picture of what we’re doing.”
Replicating a Benchmark
A recent example illustrates how Veriti uses its screening methodology to construct portfolios. “An institutional consulting firm asked us to design and manage a portfolio that doesn’t include China due to human rights violations,” Dennis recounts. “The foundation had a significant emerging markets allocation, using a money manager that is tracking the emerging market benchmarks.“They asked us to create a custom portfolio that would mirror an existing emerging market index but would exclude China and screen out other negative factors. We took a set of ADRs and used the information we had from various sources, including TruValue Platform, to screen out all the bad actors and still get a tracking error relative to the benchmark that was acceptable to the client. Now they have a proprietary portfolio of 400 securities that behaves like the benchmark does over time, plus or minus the tracking error. If anybody looked at the holdings, they would find that they are completely in keeping with their mission statement and values.”With its real-time scoring, the TruValue Platform plays a pivotal role in the firm’s security selections. “The major data vendors may deem certain companies acceptable or unacceptable,” Dennis says. “TruValue Labs allows us to make certain those are still accurate assessments. There’s no way to do that without TruValue Platform.”
The Future of Responsible Investing
Veriti is is built to do good. “We think we’re going to see a huge demand for this if we get it right,” Dennis asserts. “The next generation is interested in doing the right thing, not just making the maximum dollars possible. And there’s quite a bit of academic literature supporting the idea that doing well also enables you to do good.The goal is to try to earn at least as much money as the benchmarks and still have good ESG scores. In fact, some studies have shown that high ESG scores correlate with higher performance, and low scores with low performance.”Veriti’s goal in adopting the TruValue Platform and integrating it with other data sources is to build a proprietary socially responsible screening system that is “much more robust than anything out there,” Dennis says. “Our whole notion was to build TruValue Labs’ data into our platform from the beginning. To build a platform simply with one of the two main ESG providers is old news.”
Automatic Alerts for Portfolio Tracking
Veriti relies on TruValue Platform not only in building portfolios, but in monitoring and maintaining themas well.“The platform has an alert system that gives us a heads-up if a security falls below a particular level,” Dennis says.“We have it set to a certain sensitivity, and we get an email if anyone falls below that. We would not have the ability to do that any other way.”The platform generates an Insight score that ranks a company’s ESG behavior at a given point in time, while theMomentum score shows the company’s trajectory of ESG performance, positive or negative. “It gives us the ability to track every stock in the portfolio on a daily basis and understand if for any reason anyone is getting negative press,” Dennis says. “One of the last things we want is to have a security that would embarrass any clients who believe they are practicing SRI. They don’t want to read about it in the New York Times for the first time. They want to hear about it from us, and we rely on TruValue Labs for that knowledge.”