The Future of Fintech and Wealth - 'ESG' is the most important thing you've never heard of
If you change how money moves, you change the world. Money touches everything. Want to build a school? You need money. Want to prevent unsustainable business models? Want to prevent human trafficking? Manage the money flow.
If you want to change the world, change money and investment. That’s my mission in life and why I care so deeply about what we do at 11:FS. It’s not about apps, it’s about outcomes for people, and at the risk of being cheesy, yes the world*.
* Hooli / Silicon Valley references welcome
If your brand doesn’t have a purpose, you don’t have a brand
We live in an increasingly divisive world. This post isn’t about those echo-chambers and what social can/could/is doing to make that better or worse. This post is pointing out that, in this world, everything has to have a purpose. You can’t be just corporate-speak any more.
The upshot is you have to stand for something. Customers don’t buy what you do, they buy why you do it, as we move to a society that increasingly cares about the impact brands have on the world. What's new is the link between how your savings are invested and the impact that has on the world. What better way to leave a lasting legacy on the planet than to have your entire savings focussed on a cause you believe is good for the world? Money is increasingly moving towards a cause, and I believe this is coming to investments in the way it has already come to advertising.
Increasingly not only everything you buy but everything your money touches can and will be measured for its impact
Finance and meaning
Finance brands have got better at attaching meaning to marketing. Increasingly you see branding agencies help the largest banks towards marketing slogans that capture the zeitgeist or the feeling of being in a key moment of life like buying your first home or starting a family. We’re now seeing challengers do more.
The perfect example of “standing for something” beyond marketing or having meaning in retail banking, has been the responsibility many UK challenger banks took upon themselves to prevent gambling abuse through in-app features. This strategy was then copied by the high street banks but originated with challengers who took a stand for something and just went ahead and did it (there’s a whole other blog post about how mimicking feature sets isn't the same thing as originating them, but that’s for another day).
Yet this is just scratching the surface. It’s still pushing financial products rather than recognising the impact retail deposits, savings and investments (in their many forms, including pension funds) have across global supply chains. Everything you can see around you, every desk, chair, phone, snack, all of it, came through a global supply chain. How money moves shapes the world around us and most of that is done without our involvement, consent or awareness.
Increasingly not only everything you buy but everything your money touches can and will be measured for its impact on the environment, social responsibility and corporate governance. Or...
Investors themselves are increasingly searching for much more than a return when they invest
Enter “ESG”
While it sounds like a food additive, it’s actually a way to measure corporations by their impact on three main areas:
- The Environment (E)
- Energy use, waste, pollution, animal treatment - Social Responsibility (S)
- Supplier responsibility (e.g. retailers using fair labour suppliers), employee treatment, charity or social work - Corporate Governance (G)
- Use of transparent accounting methods, shareholder votes, avoiding investing in political campaigns directly
How you actually measure each of those three elements is a subject for intense debate, but the mere existence of this debate in the world of investments suggests that investors themselves are increasingly searching for much more than a return when they invest. What’s the point in making a 7% return when I destroy the planet for future generations?
Interestingly, it turns out that securities (debt or shares mostly) which have good ESG scores (i.e. aren’t that bad for the world) tend to have better returns than non-ESG securities. Noodle on that for a second. Doing good produces enhanced financial returns. Mental. Who knew?!
Does ESG = meaning?
Given everything, you’d hope then that a company (or fund full of companies) that you held in your pension fund would be having a positive impact in the world, and you could sleep well at night knowing your savings are also making the world a better place. ESG, is a great step forward and is being taken seriously by major pension funds, asset managers and is on the rise with wealth managers.
BUT.
Let’s take an oil producer who buys lots of carbon credits. Or a tobacco company who spends a lot of profit on charity initiatives. A plastic producer who is carbon neutral. All of these companies can score well on many “ESG” measures.
Impact is more than carbon offsetting for your evil.
Impact is broader than ESG
Impact is about what a company produces. If a company produces oil, it doesn’t matter how many carbon credits they buy, their impact on CO2 emissions is negative. If a company produces biodegradable drinks straws but doesn’t yet donate massive amounts to charity, their impact is still positive.
Over the past year, ethical funds have performed better than their traditional counterparts, posting an average growth of 16.8% compared with 15.2% from the average non-ethical fund. The average ethical fund (30.4%) has also eclipsed the average non-ethical fund (29.1%) over three years, but it’s over five years that ethical funds have really performed well, with the average ethical fund returning 76.1%, compared to an average non-ethical fund return of 64.1%.
Society and customers increasingly care about their impact on the planet, and are looking for those small everyday things they can do to have impact. In the 90s, there was a real push for everyone to switch to energy-saving light bulbs and perhaps naïvely, we thought small changes like that would add up to a big one. They haven’t.
Impact is how you create meaning. One of the reasons people are choosing to eat more vegan meals (even if they’re not vegan), or why sales of sustainable products and carbon neutral products are increasing, is because they have meaning to their buyer.
Retail is almost 20% and pension funds make up a near 45% of the investments market (65% combined). If the link between impact and investing can be made clear to consumers and pension holders, you can massively reshape how the market invests around consumer sentiment. Imagine if 65% of the investments market moved with consumer sentiment towards impact investing. You could fundamentally reshape what gets invested, and therefore behaviour, in markets.
Beyond that, what really excites me is how you can then use the measurement of impact to activate and re-engage consumers and customers in the investing process. How do you link the impact of an investment to something real-time to the consumer and make it feel impactful?
Humans strive for meaning. For me, moving investments towards real meaning, not just marketing, is what gets me out of bed and it’s how we change the world.
Who’s with me?!
If you change finance, you can change everything
Investing and everyday impact
A few weeks ago I asked "What if every time I bought a coffee someone planted a tree?" I was inspired by how apps like Acorns, Moneybox and Plum use micro-savings to help cash-poor customers and gradually move them up to investments. I love that link between how my everyday behaviour impacts the rest of my life.
Now imagine we have another behavioural lever? In behavioural economics, the term “defaults” means a way something can happen automatically so there is less friction. Examples would be “opt-in by default” or how in the UK all full-time employees must be given an employer pension by default.
This is exactly how these micro-savings products work. You default to rounding up a transaction and saving, or sweeping money at the end of the month. These defaults then help you invest.
Now imagine we also created a default where those investments went into a fund that had impact. When it comes to “surprise and delight” we could provide real-time feedback every time you roundup, sweep, or then voluntarily increase your monthly saving amount and quantify the social impact.
For example, if you save an extra £100 a month, not only are you generating yourself another £1,200 of savings, that would make a 7% return in the impact fund, that fund plants a tree for every £1 you invest (health warning: these numbers are purely hypothetical, I’m not suggesting such a thing exists, and even if it does, always consult a financial advisor and never invest money you can’t afford to lose!).
Creating products with impact
Somewhere in the middle of micro-savings, behavioural design and funds with measurable impact that give real-time feedback to customers is a product that could have real impact. Creating products with impact is what we do at 11:FS and it’s why I love fintech so much. If you change finance, you can change everything.