Companies across the world are taking a stronger green initiative, ranging from small startups to larger, more established organisations. Those who are considering ESG more are garnering more attention from investors. As ethical and sustainable concerns are being normalised in day-to-day life, the public should expect it to become normal in the investment world too.
Thanos Bismpigiannis, Head of Product – Wealth at Plum, has worked in the financial industry for over 10 years. Here he talks about how technology is taking investing into a green future:
From the political party we support, to the coffee we buy in the shops, environmental, social and governance (ESG) considerations have become a part of our everyday lives. Green issues have moved from being a fringe interest to being something that concerns us all, thanks to worldwide agreements like the Paris Accord and activists like Greta Thunberg. These considerations have become both every day and critically important as we look towards building a better world.
As the world wakes up to ethical and environmental issues in their everyday lives, the financial sector is starting to care more about these issues too. The last decade, in particular, has seen interest in ESG expand across the board, with both institutional and individual investors adapting their priorities accordingly. A recent report by Deloitte suggests that ESG-mandated assets in the United States could grow almost three times as fast as non-ESG-mandated assets to comprise half of all professionally managed investments by 2025. The Covid-19 pandemic has accelerated this even further, with Morningstar reporting that sustainable funds held up better than conventional funds in the first stages of the pandemic. We’ve also found that when surveyed, around half of all Plum investors would rank a fund with an ESG focus either as their first or second choice across a broad set of fund options.
This increase in interest is paired with a general boom in investing as it becomes more mainstream and accessible thanks to technology. At Plum, we’ve seen investor numbers triple between January 2020 and January 2021 alone, thanks to a decrease in spending during the pandemic and low-interest rates meaning people want better options to grow their money. Traditionally, retail investors would have left choosing the right fund to a financial adviser, if they could afford one. However, the arrival of robo-advisors like Nutmeg and Wealthify, and easy-access investment apps like Plum, has meant getting started with investing is much easier and more affordable than it was previously. This new wave of tech-enabled investors has more autonomy and direct control over where they put their money.
As more people flock to investing, they have a more diverse range of interests that are reflected in their investment patterns. Under 35s are particularly clued up when it comes to ESG issues, and, as we’ve seen recently with the GameStop frenzy, they already have the power to move markets. This is the generation that has grown up with the threat of climate change looming, came of age during the financial crisis, and, with the internet at their fingertips, they also have access to any information they want to know about the impact their investments will have on the world.
The good news is that even the most traditional financial institutions are starting to sit up and take notice of this trend. We’re already beginning to see better options out there for those who want to consider ESG when investing. While a lot of progress has been made in terms of the availability of these kinds of funds, there is still a lot of evolution to be done before ESG investing becomes as mainstream as, say, choosing to buy coffee from a roastery that uses Fairtrade or Rainforest Alliance coffee beans.
This is primarily because, unlike with coffee, there is no industry-wide marker of what ESG really means. Instead, institutions and fund managers have their own definitions, which can often end up being far-removed from those of their retail investor customers. Though most managers agree that companies that deal in industries like arms or tobacco have no place in an ESG fund, the details between different companies become more difficult to define. When you have a market of educated retail investors, there’s nowhere to hide if your ESG fund contains companies that your investors don’t like. Not only does it really damage trust if your definition of “ethical” does not match up with that of your customers, but it also makes it very difficult for investors to compare companies side-by-side if the criteria is not set in stone.
In the short term, institutions and fund managers can combat this by offering a good range of ESG funds and being fully transparent about their process for choosing the companies within them. Yet, as more and more investors show an interest in ESG, over time the selection process will need to be streamlined and standardised, similar to the way companies use the same standard to report financial results. This should give people a solid frame of reference that they can trust when they make investment decisions. Some companies are already working towards this, which is a good sign.
With a framework in place, we can see a future on the horizon where most people consider the ESG impact across all of the funds in their portfolio, rather than it being a label for one specific fund. Ultimately ESG is more than just a trend; it’s a reflection of changing priorities globally. As we see ethical and sustainable concerns being normalised in our day-to-day life, we should expect it to become normal in the investment world too. It’s a very positive sign that this is happening. People are now looking to build a world that will last.