When it comes to the subject of investing, a discussion on ethics might not be the first thing that springs to mind. After all, the primary function of companies is to make money for their shareholders, and the only reason you invest in a company is to see a return on that investment, right? Well, the landscape is starting to shift, thanks to a new generation of more ethically-minded investors, and a fintech market that is capitalising on this.
ESG, or Environment, Social & Corporate Governance, is a driving force behind this new industry layout. These are three factors used in measuring the sustainability and societal impact of a business. Understandably, ESG factors have historically lagged behind financial and political ones, when it comes to making business and financial decisions.
Now, recent trends show that this is no longer the case and that, when it comes to these decisions, ESG considerations are now a major influencing factor. In part, this is because they have noticed the financial benefit of doing so – for example, investing in companies and assets with a high ESG score often leads to better returns and carries a lower risk. This is backed up by a recent study carried out by Morningstar who found that, over 10 years, the average annual return for a sustainable fund invested in large global companies has been 6.9% a year, compared to 6.3% for a traditionally invested fund.
Where millennials lead, markets follow
Aside from the potential financial benefits that come with a more ‘ethical’ approach to investing, the recent explosion in popularity of this investment represents a cultural shift as well. Millennials, and their financial decisions, are proving that they are capable of having a significant effect on the markets, by voting with their wallet.
And, right now, Millennials are clearly prioritising ethically-led products and services. They are increasingly taking ESG factors into account – for example, a 2019 survey by financial services group Allianz found that 64% of millennials are likely to make investment decisions based on societal problems that are important to them.
There are two main impacts from this shift in market perspective – the introduction of new fintech products, and the reaction of large corporations. Looking at the fintech community, many fintech companies have been tapping into, and benefiting from, the millennial focus on ethical investing.
First up, you have fintech startups who are providing platforms that put sustainable investing to the forefront. One such example is Clim8, a UK-based investing app that only lists public companies that have a clear manifesto to tackle climate change. Turning to Finland, there is the startup Cooler Future, who offer a similar platform, with the added feature of allowing users to track the carbon dioxide impact of their investments, along with the financial returns.
Large corporations, recognising this trend, are now also turning their gaze to sustainability fintechs. For example, Moody’s recently announced its acquisition of a minority stake in MioTech, a provider of ESG data & analysis tools in China, and Fintech Wahed Invest, who provide robo-advisor investment services for the Muslim community, has acquired the UK-based challenger bank Niyah to alllow them to offer an ethical financial platform to Muslim consumers in the UK.
Furthermore, the world’s largest investment fund, Blackrock, announced at the end of last year that they were putting environmental and social priorities at the forefront of their investment approach. The fund, which has almost $8trillion of assets under management, stated that it expects companies it invests in to disclose a plan for transitioning to a lower-carbon economy, report key stakeholders and business interests, and improve racial and gender diversity on large corporate boards.
ESG Factors – The Future of Investment?
ESG factors, and the market built around measuring them, are clearly here to stay – and you should expect to see further growth in this area in 2021, thanks to the growth of the millennial investor, and widespread concern about the environmental & social sustainability of businesses.