How technology is transforming ESG and values-based investing

Values-based investing has proliferated over the past few years, in large part fueled by younger generations’ desire to ensure their money supports companies that align with their personal beliefs. One look at the numbers shows that this practice of considering the environmental, social and governance impact of an organization when deciding whether to invest in it is showing no signs of slowing down.

In fact, a 2020 study found sustainable investing accounted for $17.1 trillion of professionally managed assets, for a 42% increase since the beginning of 2018. With more evidence than ever showing that investors don’t need to sacrifice profits to invest based on their values, it’s clear this space will keep evolving. Part of this evolution hinges on technological innovation. Here’s a look at three ways that tech is transforming the ESG and SRI markets today:

MEETING THE NEEDS OF NEXT-GEN INVESTORS

With millennials and Gen Z’s propensity for standing firmly behind causes they believe in, it’s hardly surprising these cohorts are fueling the rise of values-based investing. In 2020 alone, millennial investors contributed $51.1 billion to sustainable funds — compared to less than $5 billion in 2015. As these numbers continue to rise, savvy firms realize that to continue to capture the massive market these generations represent, they must adapt the products and services they offer them.

Today’s digital natives prefer self-service options and social media over pay-to-play management services and financial advisers. They’ve witnessed first-hand the rise of financial services democratization with technology that provides unfettered access to markets at a fraction of the cost. A recent survey of Americans found that 31% of millennials say digital sources have played the most significant role in shaping their attitudes toward money (compared with 15% for Gen Xers). Only 25% would go to an in-person expert for advice. This goes hand in hand with findings showing a similar digital shift for the retail banking sector.

Other studies have found that millennials are twice as likely as baby boomers to consider using a robo-adviser for investments. Incumbents, neobanks and fintechs have adapted to these shifts and used technology to get younger investors in the door, and are catering to their social concerns and personal beliefs to keep them.

Not so long ago retail investors could only self-select equities that aligned with their values, or purchase shares of a socially responsible equity fund, through their financial adviser or broker. Today, younger values-based investors have access to technology that suits their needs in a much more personalized manner. Do you want to use your investment funds in a sustainable way that exclusively focuses on climate change? Are you someone interested in aligning your investments with your religious beliefs — like halal-friendly investments? Perhaps you’re worried about not having the time to identify such equities or the money needed to engage a financial adviser to do the work for you, it’s not a problem — there’s an app for that.

DEMAND FOR GREATER FINANCIAL TRANSPARENCY

Today’s generation expects corporations to act as much as they speak, and public statements and social media campaigns are insufficient. To garner the full support of these highly vocal and influential cohorts, organizations must display the utmost authenticity and transparency.

We’ve seen a rise in concerns over issues such as "greenwashing," in which investments are pegged as green but upon closer examination prove less sound than advertised. As a result, six in 10 investors globally are worried about the lack of a clear definition for sustainable investment. And according to FactSet, 70% of millennial high-net-worth investors expect their wealth managers to screen for ESG factors. Yet even for the best-intentioned organizations, this presents a challenge.

There's also a need to stay on top of organizations as they evolve. The rise in M&A globally has created a shift in the speed and frequency with which many companies invest in new products and businesses, which can occasionally alter their value-based compliance. Nonetheless, value-based investors want to know when corporate shifts cause their funds to be allocated to projects that no longer align with their values, no matter how slight the departure.

There are countless ways even the most scrupulous screening boards can overlook these sorts of shifts given the amount of data they need to filter through. However, by applying AI and machine learning, impact funds can now search and filter through massive amounts of data to identify and calculate information more efficiently.

This includes unethical behavior, the acquisitions of a questionable revenue stream or anything in between. These technologies also take a front seat in reporting on the total impact public companies make with their allocated funds.

EVOLUTION OF DIGITAL DIFFERENCE-MAKING

Recently, we’ve seen countless examples of digital movements that have galvanized the masses in ways that lead to meaningful changes for society. These movements have occurred in the investment world too, as seen in the coordinated social media efforts of WallStreetBets and the online community’s short squeeze on stocks like GameStop and AMC, which surfaced important questions relating to the balance of power in the legacy investment world.

While the causes may vary, what these movements have in common is that they illustrate how technology has given individuals from all backgrounds the ability to make a difference. With innovations in the values-based investing space evolving alongside the rise of today’s cause-driven generations, individuals are now empowered to make a positive change through investing.

With the rapid rise of technology meeting the needs of the next generation of investors, ushering in greater transparency, and expanding how investors can support causes and beliefs that they align with, the rise of values-based investing has no ceiling. As more and more generations seek to maximize impact and profit, how people view and make investments will continue to change, and so too will the world around us.

Samim Abedi is chief investment officer at Wahed, a digital investing platform.