Co-Founder and Chief Strategy Officer at OpenInvest, a venture-backed technology company dedicated to mainstreaming sustainable investing.
Environmental, social and corporate governance (ESG) is not just investments. Our industry is aiming to build a “moral consistency machine.” As the co-founder of a company in the sustainable finance sector, I’ve observed that finance is simply a strategic starting point for the broader values-based economy.
The popularity of ESG investment strategies continues to grow — with contributions up nearly 90% in the fourth quarter of 2020 versus a year ago. At the same time, technology has evolved to support more transparency, personalization and engagement for investors. ESG will soon graduate from a set of products to features that stream across the entire financial desktop.
From there, the possibilities seem limitless. If software can create an investment portfolio based on your values, connected technology could curate custom consumer purchases, political voting recommendations, media feeds — essentially an “ESG Everything Store.” In turn, data from these lifestyle choices can reflect into your finances and beyond.
Changing The Game With Tech-Enabled ESG
For ESG to mature, it must first expand beyond “green funds.” As I discussed previously, this transformation is already shaping the industry.
MORE FOR YOU
With the emergence of custom direct indexing, advisors and investors can customize portfolios to reflect each client’s values. [Disclosure: My company creates custom direct indexing software.] Clients have transparency into their holdings, can make changes any time, see their impact and vote in shareholder resolutions with a swipe on their smartphones. And thanks to new media, they can share all this activity with others.
With these pieces in place, shareholders in a company can have a conversation about what they should be doing. Shareholders could vote, run campaigns and, if they don’t like the outcome, easily divest. No financial sophistication is required as software can automatically rebalance and maintain their portfolios.
Technology is currently reinventing ESG investing, allowing us to cut through traditional fund managers, coordinate with fellow shareholders and wield our power as corporate owners.
Just The Beginning For ESG Finance
I believe ESG technology may soon hit financial planning. Planning is a natural home for ESG because it is often when advisors engage clients holistically, understanding their hopes, desires and goals. This year, the industry may begin to see social and environmental questions added to client onboarding and financial planning checklists. Armed with a modern custom direct indexing chassis, advisors can potentially do something new and useful with this knowledge: bake it into the products themselves. Clients will have personalized solutions that reflect where they work, their financial goals and taxes and what they care about.
Next comes consumer spending. Are your clients shopping at Whole Foods or donating to specific charities? Advisors can receive nudges around social or environmental issues their clients may want to see reflected in their portfolio.
The client-first ESG revolution will aggregate, distill and transform this data for client usability. Quality reporting completes the virtuous cycle: It actualizes the value of these new capabilities and gives clients leverage for impact. [Disclosure: My company provides reporting services.]
The ESG Everything Store
Do you ever feel like you want to do the right thing, but the idea of wading through all those political down-ballots, referenda or shopping choices is too overwhelming? You’re not alone. Many Americans care about things and want to see their ideals reflected in their lives. A lot of us are just too busy to do it.
What if you had a trusty sidekick that could expedite your decision-making? Once your values are logged through your financial planning processes and investment choices, an AI ethical assistant could connect that data to nearly every digital interaction. This software would help you filter your consumer choices, voting recommendations and charitable giving.
Just as the ESG industry cut through the corporate data jungle to organize finance, this mandate would expand — organizing, demanding, commodifying and ultimately automating the extension of your values throughout your digital life.
From ESG Everything Store To ESG Society
I believe the transition to a global, values-based economy will occur through the unification of an ESG taxonomy and currency itself.
Money cannot store metadata, which means externalities are lost with each transfer. For example, if someone stole money and used it to pay me, how would I know? If I had an inkling, would I still want the cash? I’ve observed that many institutions — mostly nonprofits — already won’t accept direct contributions or purchases from industries such as weapons or tobacco. This “one degree of moral separation” makes sense. But we shouldn’t have to stop there.
The star feature of cryptocurrencies is that they maintain a public ledger of all transactions. We can all know what was bought and sold previously through the entire life of each digital coin. As we transition to what looks like a cryptocurrency-based economy, organizations could reject money transacted for purposes misaligned with their values within, say, three degrees of separation.
In the future, currency will likely become “de-commodified,” with premiums and demerits automatically calculated on your wallet at the point-of-sale, based on the buyer’s values.
The ESG transformation began with finance. I predict it will soon fan out through our economic and political lives and finally cycle back into money itself.
The End Of Apathy
Because we evolved to care about the here and now, our brains can struggle to process all our modern decisions and impacts. We may find ourselves more concerned with a stain on our shirt than a million refugees. This “problem of moral distance” is our Achilles’ heel. Apathy allows wars, poverty, environmental destruction and inequality to perpetuate, despite us having more than adequate societal resources to combat these problems.
ESG is striving to end apathy by collapsing the distance between our actions and their impact. As technology improves, ESG is the taxonomy of a postmodern era — a digitally connected stakeholder capitalism that allows us to reap the benefits of industry while fulfilling our humanity.