Environmental, Social, and Governance investing describes the practice of investors choosing to finance assets that will also produce the positive change they wish to see in the world. After all, the days of having to choose between making money and following the rules are over. There are plenty of companies to choose from, like Deutsche Telekom, Reckitt Benckiser, or Burberry Group, who do well by doing good—or at least doing better than everyone else.
But while that may suit the fancy of institutional investors, does your average retail investor (ie. you and me) really want their investment to disappear into something that large and anonymous?
A focus on personal impact
Many retail investors for whom ESG principles are important choose to donate to global causes. The reason is simple: when it comes to charitable giving, it is cheaper to save a life in a small, rural community than it is in a global metropolis. Does that mean that consumers care more about distant causes than local ones? Changes in attitudes toward the ethical behaviour of corporations would seem to indicate otherwise.
According to Mintel, 97% of consumers believe it is important for companies to behave ethically, and according to Deloitte’s 2023 report, more and more of them are making hard choices, from spending more on brands that reflect their values to repairing instead of purchasing. Clearly, then, what we’re actually seeing is that people around the world, and particularly in markets like the US and EU, want their money and their time to change the world for the better. The cost of doing so remains a limiting factor, but the desire is sincere.
Okay, but what about the money?
We talked about charitable giving, and we talked about personal choices, but surely investors see the world through colder, more analytical eyes? In short, yes—only 37% of retail investors in the G7 markets (Canada, France, Germany, Italy, Japan, UK, and USA) reported investing with ESG in mind in 2023, but that’s up from 24% in 2003! And why shouldn’t they? Companies that are able to pursue ESG targets often have the structure to pursue their business objectives as well, and while the cause and effect is arguable, there are several studies like the 2020 S&P 500 ESG Index Dashboard from S&P Global that show they’re actually outperforming non-ESG companies.
It still can’t keep up with private equity
Any good investor will tell you that access to private equity is the real difference between the literal haves and the have nots. There is huge variability in the market based on strategies, market conditions, and regions, but the bottom line is that, over the past 20 years, the S&P 500’s average annual return has been 10.5%, and the U.S. Private Equity Index’s was 14.65%. That difference is enormous when compounded over years or generations, and most private equity investments have prohibitive minimum ticket sizes—if you can be at the right time and the right place with the right connections to invest at all. The returns on early-stage investments in Facebook (now Meta), Uber, Airbnb, WhatsApp, or Alibaba Group are staggering, but you didn’t miss them, you were never in the room.
Bringing it all together
So how can we, the people, access high-return investments that are personally relevant and local while delivering high impact for every Euro spent? Decentralised financing of social enterprises may be the answer. Decentralised finance (DeFi) is a way to use automation to handle things that would normally be done by bankers and lawyers, which keeps costs low and allows, for example, thousands of investors to collectively fund a project when before it might only have been one. These low costs and fast transactions mean that people with as little as a few hundred Euros might be able to invest directly in a company. DeFi also means the allocation of those funds can be transparent. You don’t have to wonder what your money was used for—it can often be traced directly to the asset or materials it was spent on, and similarly the rewards come back to you with full transparency and minimal waste.
Is it real yet, or is this for the future?
Take Parisian startup Erable (Erable.com). In the past two years, they have allowed thousands of retail investors to invest directly in social enterprises which are also located in Paris. The projects are down-to-earth and immediately positive, like refurbishing electric vehicles or renting and repairing washing machines instead of sending them to the landfill. Ticket sizes average 300€ for students and young adults, up to 5,000€ for older investors who want to make money while making a difference, and they’re getting both. That electric vehicle repair project returned 20-25% annually. While they’ve been fully subscribed on their recent projects, it’s worth checking them out from time to time and seeing if something new has landed on the page.
Conclusion
The role of new and disruptive technology is to push power from nations and corporations to individuals, allowing each of us to learn more, do more, and make our own choices. While the world of finance—particularly private equity—has been a privileged sector with high walls for a long time, the advent of new technology (and the entrepreneurs wielding it) is letting the rest of us in to pursue our passions, which according to research are increasingly trending toward making the world a more sustainable place while supporting our lifestyles as well.
