A friend and I recently talked about developments in the German Fintech market and services like Crowd Investing, Robo Advisors, Social Trading, Blockchain technology and so forth. It is astounding how it disrupts the market and has so much potential for further development. I decided to do some reading as my personal interest was triggered by the topic ethical investments, or Socially Responsible Investing (SRI) and what place it has in the rapid development of financial technology.
The goal of SRI is to make lucrative investment choices that have a positive impact on our environment. SRI comes in many forms, but one of the most common is avoiding investments in so-called bad companies. The global economy has been built by companies who often act as poor corporate citizens, ignoring their impact on human rights and the environment.
SRI offers investors the opportunity to reward those companies that have evolved from this ‘old-fashioned’ past and are working to build the sustainable economy of the future. And something else has also changed — investors now expect a competitive return for investing with a conscience.
The Forum for Sustainable and Responsible Investments 2016 info-graphic put the amount of investor capital that was devoted to SRI at €7,4 trillion compared to 2014 a 33% increase (US numbers) And on top of that the Millennials are on the rise. Millennials are currently skeptical about financial services, with good reason. The came of age during a devastating financial crisis, wrought by conscience-lite investment bankers. This does not interfere with their socially-minded outlook. Of course, a second problem is that they don’t have a lot of money (student debt, high housing costs, depressed wages) have left them with little spare cash to save.
According to research conducted by Morgan Stanley, 86% of Millennials, broadly defined as those born between the early 1980s and 2000, say they are interested in socially responsible investing. The millennial generation (like me) are concerned in making a difference, and they choose to invest in and buy from companies that are making a social statement.
Where’s the evidence that socially responsibility pays for (millennial) investors as critics point to poor results?
Traditional investing focuses on tangible measures of a company’s value, such as profits and sales growth. But those measures are easy for anyone to see and understand and so they’re already reflected in the price of a single share. In contrast, social responsibility is intangible and so investors have a particularly hard time valuing it. A majority of investors still undervalue socially responsible firms, which means bargains are available for forward looking investors. SRI makes financial sense precisely because many investors incorrectly think that it doesn’t — and so they undervalue socially responsible companies.
But many socially responsible funds underperform traditional assets. But so do many traditional mutual funds and that doesn’t mean traditional investing strategies don’t make financial sense. The essential part is to evaluate and screen socially responsible strategies (SRI basics). The shortcomings of any number of socially responsible mutual funds or companies don’t alter the premise proved by broad-based research: SRI works but is not perfect. But it’s making a difference.
How to measure the value of a company’s environmental stewardship and social responsibility?
It isn’t easy, but it’s getting easier. Investors don’t have to rely solely on companies to report their own socially responsible activities. Independent information like for example a best companies list (please update me on alternative / better lists) that gives investors — willing to do the legwork — an indication of socially responsible company’s performance. It seems at this point most investors aren’t keen to do the pioneering — and again this is the advantage of investing in socially responsible companies.
SRI to be accelerated by Fintech?
To give you an example: the leading US Robo Advisor Betterment launched its SRI portfolio and like other similar products, it will reduce investors’ exposure to companies deemed to have a negative social impact and increase exposure to firms thought to have a positive one.
In the case of Betterment their SRI portfolio differs from its standard portfolios only by one asset class. Why is that? First of all SRI products need to meet environmental, social, and governmental (ESG) criteria. What constitutes an acceptable set of ESG criteria is to some part subjective, so investors will need to do the research to find investments that match their own values. Another factor is the supply of SRI alternatives simply aren’t available or because funds on offer are in some cases more expensive and costs would have to be passed on to consumers.
Nevertheless, Fintech and the rise of millennial investors could help make SRI mainstream and to create more conscientious investors — and with Millennials leading the change. Fintech solutions will make it simpler for tech-savvy consumers to access SRI investments, effectively expanding the borders of an investment space that until recently has been limited to institutional investors such as hedge funds.