investing

Invest Your Conscience with Ethical Trading Apps

From Betterment to Ellevest and Weathsimple, socially responsible investing apps are gaining steam. And those worried they’d have to sacrifice returns to do good may be pleasantly surprised.

Sustainable funds attracted $20.6 billion of new investment in 2019 — that’s four times more than the previous year. The influences of stock-trading apps and younger generations are largely responsible for the shift.

Now this once-niche venture is turning mainstream, it raises questions about the knock-on effects. To secure investment, corporate boards must pay attention to ethical concerns, from employee rights to carbon footprint.

Is ESG investing profitable?

If you are a lone investor, and you are reading this article on ESG investing, you are probably focused on one question: Is ESG investing profitable?

There is a short answer to this question: yes.

That might seem counterintuitive. Many people (and corporate boards) don’t get into ESG investing in order to maximize their profits. They do so because their conscience has guided them to invest in an ethical way, or because they are looking to signal that they are a responsible brand. This leads many investors to assume that ESG investing is less profitable than “traditional” approaches.

In reality, this is not the case. Adopting ESG practices, according to research by Oxford University, is correlated with lower operating costs, better profitability and superior share price performance. In this research, 88% of the 200 sources reviewed found that companies with solid sustainability practices have better operational performance, ultimately resulting in increased cash flows, and 80% of the sources reviewed showed that prudent sustainability practices have a positive influence on returns on investment.

For individual investors, the rewards offered by ESG investing can be just as dramatic. Just take a look at the S&P ESG Index compared to the S&P 500 Index over the last three years, and you’ll see that ESG edged out the general market 33.25% to 32.73%. In other words, ESG investing doesn’t just offer a more ethical, sustainable way of investing; it can also provide higher returns.

What ESG investing is and isn’t

Ethical investing — also known as Environmental, Social, and Governance (ESG) investing — focuses on companies that have a positive impact on society.

After the rise of ecological concerns and the mistrust in the financial system prompted by the 2008 economic crisis, the popularity of alternative investment strategies shouldn’t come as a surprise.

So, what exactly do we class as “ESG investing”?

Busting the myths

Although socially responsible investment has existed in some form for decades, the definition has shifted in recent years.

Historically, wealth managers defined “ethical” as anything not directly related to firearms, alcohol or cigarettes. In the past, a perception grew that ethical portfolios only encompass a tightly defined range of stocks — ruling out the unsustainable energy sector completely.

Now, most ESG funds include a wide range of stocks. Instead of omitting entire industries, they include firms moving in the right direction. The chief factors considered include:

  • Carbon footprint
  • Environmental impact
  • Employee relations
  • Community involvement
  • Product safety
  • Diversity among boards of directors and executives
  • Communication with shareholders
  • Clean accounting

Naturally, the exact criteria vary among investment firms. There are over 300 ESG mutual funds and exchange-traded funds today — some more ethical than others.

The rise of Millennials

The Millennial generation is often portrayed as living a paycheck-to-paycheck existence, scraping together the money for rent each month. In reality, this generalization isn’t fair. Millennials now make up the largest share of U.S. investors with a net worth of more than $25 million. The share of wealth held by Millennials will only increase over time, so corporate boards can’t afford to ignore them.

It’s younger people who are driving the trend toward ESG investing. Almost 90% of Millennials want to tailor their investments to their values, and Generation Z is likely to follow in their footsteps. 

We can’t overlook the interest of older generations, either. Around 44% of Boomers said they found sustainable investment most appealing, compared to 52% of Generation X and 56% of Millennials.

Changing ways of investing

Of course, not everyone who likes the idea of ethical investing will make the leap. There are a few barriers to entry. Many Americans are unsure how to start investing or how to know which funds to choose. They may feel they lack sufficient information about such factors as business practices, racial equality and working conditions.

That’s where stock-trading apps — which do the work for you — come in. Younger generations are also the most likely to favor platforms like Robinhood over traditional online brokers like, say, E*Trade or Fidelity.

Ethical investment apps

Lack of information has long been a hurdle for potential investors. Traditional investment platforms can seem intimidating to anyone who believes they aren’t in the know — especially younger people.

Investment apps have changed everything. It’s no longer necessary to handpick names of foreign-sounding mutual funds or consult a pricey financial adviser. An app can do everything for you.

In many cases, a robo-adviser can do the work. Using data and algorithms, these automated advisers will give you suggestions based on your risk preferences and saving goals — and now, your ethical standards. Further, many popular robo-adviser platforms now integrate with popular accounting and invoicing apps, making them a valuable asset for small businesses and gig workers.

Recommended apps to watch

As the name suggests, Earthfolio focuses on environmentally friendly stocks. It’s one of the oldest names in the ESG investment business, with a history of over 20 years. 

However, the minimum investment requirement to use the platform is $25,000, which is prohibitive for many investors. The apps listed below have no minimum investment requirement:

  • Betterment is another well-known robo-adviser, with a 10-year history. It doesn’t exclusively offer ESG products, but customers can choose to either eliminate socially negative companies or add socially positive elements into their portfolios.
  • For those wishing to focus on social issues, Ellevest could be a good option. It specifically focuses on the gender gap in investing and offers products tailored to women — most investment professionals and investors are male, meaning the needs and concerns of women are often ignored. Ellevest is also a robo-adviser.
  • Weathsimple — again, a robo-advisory platform — offers very specific investment niches. Users can use their money to support anything from gender diversity to Halal products. There’s also the intuitive choice between conservative, balanced or growth options — affordable housing is deemed to be safer than low carbon exposure, for instance.

Corporate boards must act

As the tide turns increasingly toward ESG investment, companies risk being left behind and losing shareholders if they don’t take action. 

Many people view corporate social responsibility as insincere — a shill to attract fresh recruits and raise a company profile. Now, commitment to ethical practices may have to go beyond the surface level. As demand increases for genuine ethical investment and robo-advisory apps try to satisfy it, methods for assessing the real sustainability of corporations are likely to become more sophisticated.

Corporate boards must ensure the future performance of their companies, so the responsibility largely falls on them to implement socially responsible practices.

A lack of action

Yet, there is evidence that many companies aren’t taking action. A 2019 Ceres support showed that only 6% of U.S. corporate directors have selected climate change as a focus issue for the next year. In fact, more than half think the investor attention on sustainability is overblown — an even higher percentage than in 2018.

The consequences of ignoring these issues could cause a serious reversal of fortunes over the next decades. Events over the last few years have proved that it’s not just investors that boards need to worry about — it’s also consumers and their own employees. Pacific Gas & Electric (P&G) went bankrupt in 2019 after costs related to the wildfires in California; meanwhile, Google saw 20,000 employees walk out in protest over its non-inclusive environment. 

Socially unprogressive policies can be costly in more ways than one.

Potential barriers

However, ESG investment isn’t all sunshine and butterflies — there are challenges along the way.

The demand for increasingly personalized portfolios that reflect specific causes and values — otherwise known as direct indexing — is hard to meet. Robo-advisers make the process somewhat easier, but it’s still a complicated and expensive task. The high minimum investment of Earthfolio reflects this difficulty.

There are also questions about what will happen to more traditional investment products. Tools like mutual funds and ETFs currently make financial sense, because they pool money from different investors together. 

Yet this approach may not work within the framework of ESG investment, since everyone has unique values and wants to invest in stocks that reflect them. Some insiders have pointed out that traditional investment products could now be nearing their end.

Bottom line

ESG investment may be yet to hit the mainstream, but it appears to get closer every day. As Millennials and Generation Z make up a larger proportion of wealth holders and more of them find out about robo-advisory apps, we’re likely to see an even larger boom in sustainable investment.

Corporate boards should ignore this trend at their peril.

Wondering whether to get involved? Diversifying into promising industries is always sensible — but you might be surprised to learn that your current portfolio already includes some socially responsible stocks.

About the Author

Tim Fries

Founder, Lakeview Capital

Tim Fries is co-founder of Protective Technologies Capital, an investment firm focused on helping owners of industrial technology businesses manage succession planning and ownership transitions. He is also co-founder of the financial education site The Tokenist. Previously, Tim was a member of the Global Industrial Solutions investment team at Baird Capital, a Chicago-based lower-middle market private equity firm.

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