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If we are talking about investing, the first thing that comes to mind is probably not a question of ethics. After all, a company's primary function is to make profits for its owners, and the only reason you invest in a company is to see a profit, right? Ok, due to a new wave of more ethically oriented investors and a fintech industry that is capitalizing on this, the world is beginning to change.
This current business structure is guided by ESG, or Environment, Social, and Corporate Governance. This are the three criteria used to assess a company's long-term sustainability and social effect. When it comes to making corporate and strategic decisions, ESG considerations have traditionally lagged behind financial and political ones.
Recent findings suggest that this is no longer the case, and that ESG factors are now a significant influence force in these decisions. This is partly due to the financial benefits of doing so – investing in businesses and assets with a high ESG score, for example, also results in higher returns and lower risk. This is supported by a new Morningstar survey, which showed that over the last ten years, the average annual return for a sustainability practices invested in major multinational companies has been 6.9%, compared to 6.3 percent for a traditionally invested fund.
Apart from the possible financial gains of a more "ethical" approach to investments, the recent surge in popularity of this investment also reflects a cultural change. By voting with their wallets, millennials and their investment choices are demonstrating that they are capable of making a major impact on the markets.
Millennials are explicitly prioritizing ethically-driven goods and services right now. They are constantly considering ESG factors; for example, according to a 2019 study by financial services firm Allianz, 64% of millennials are expected to make investment choices based on social issues that are relevant to them.
The launch of new fintech products and the reaction of major companies are the two primary effects of this change in market perspective. Many fintech firms have tapped into and benefited from the millennial emphasis on ethical investing, according to the fintech community.
To begin, there are fintech startups that have platforms that prioritize sustainable investment. Clim8, a UK-based investment app that only lists public companies with a clear manifesto to combat climate change, is one such example. In Finland, the venture Cooler Future provides a similar platform with the additional benefit of encouraging consumers to monitor the carbon footprint of their investments in addition to the financial returns.
Recognising this trend, large companies are now turning their attention to sustainability fintechs. For example, Moody's recently announced the purchase of a minority stake in MioTech, a Chinese provider of ESG data and analysis tools, and Fintech Wahed Invest, which provides robo-advisor investment services to the Muslim community, has acquired UK-based challenger bank Niyah to allow them to provide an ethical financial platform to Muslim consumers in the UK.
Besides that, Blackrock, the world's largest investment firm, revealed at the end of last year that it was prioritizing environmental and social concerns in its investment strategy. Companies it invests in should disclose a plan for moving to a lower-carbon economy, report key stakeholders and business priorities, and improve racial and gender diversity on large corporate boards, according to the fund, which manages about $8 trillion in assets.
ESG factors, and the market built around calculating them, are obviously here to remain – and, due to the rise of the millennial investor and widespread concern about a company's environmental and social performance, you can expect to see much more development in this field in 2021.
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