Everyday investors, as well as large asset managers and institutions, are flocking to ESG and impact investing. As many as 95% of millennials are interested in investing sustainably, according to Morgan Stanley.
We believe this is the year when ESG investing by U.S. retail investors will really take off.
The growing interest in ESG investing has been driven by the visibility of climate change issues, such as wildfires in California, and the awareness of social issues. That’s spurring startups as well as legacy financial institutions to introduce ESG and impact products that target retail investors. SustainFi has counted 12 robo-advisors and apps that offer socially responsible investing strategies, most of them launched over the past one to two years. Three neobanks pledging not to use customer deposits to fund oil and gas exploration were launched in early 2021 alone.
The number of options should only keep expanding.
1) Socially responsible and green banking options
According to the 2020 Fossil Fuel Finance Report, financing from the world’s top 35 banks provided $2.7 trillion to the fossil fuel industry in 2016-2019, after the Paris Agreement was signed. American banks top the list of lenders to the fossil fuel industry. The backlash against the big banks’ financing of oil and gas projects has spurred the growth in fossil-free neobanks.
Over a dozen banks pledge not to fund fossil fuels. Aspiration is the first and best-known ESG-friendly neobank, but it is no longer the only game in town. 2021 alone saw the launch of green neobanks Ando Money, ATMOS, and Climate First Bank. BankPurely even offers to plant trees when customers open new savings accounts.
Socially responsible banks generally choose to be certified as B Corporations or Community Development Financial Institutions or join the Global Alliance for Banking on Values (GABV).
2) ESG exchange-traded funds and mutual funds
For investors who want to take the DIY approach, the number of ESG fund options has never been greater. According to Morningstar Direct, the number of U.S. ESG funds grew to 437 by mid-2021, up from 392 at the end of 2020. The largest ETF launch in history, that of the BlackRock U.S. Carbon Transition Readiness ETF, attracted $1.25 billion in assets out of the gate when the fund launched in April 2021.
Investors can now choose among broad market ESG funds (that prioritize companies with higher ESG ratings from agencies such as MSCI), low-carbon funds, fossil-free funds, corporate social responsibility funds, clean energy funds, water funds, green bond funds, and many more. Carbon credit funds such as the KraneShares Global Carbon ETF are proving to be very popular as the price of carbon credits in Europe has skyrocketed. We have also found five funds that exclusively focus on gender or racial equality.
3) Investing apps and robo-advisors
SustainFi has counted twelve robo-advisors and apps that offer socially responsible investing strategies. The largest and first robo-advisor, Betterment, has recently started offering three impact portfolios, targeting broad impact, climate issues, and social issues. Carbon Collective launched in late 2020 to focus on climate change investing. EarthFolio is an ESG-only robo-advisor offering a 100% fossil-free investment portfolio. Robo-advisors from mainstream institutions such as E*TRADE and Goldman Sachs Marcus now offer impact or socially responsible options. Most robo-advisors invest in a selection of low-cost ESG funds from BlackRock’s iShares family.
4) Personal financial advisors
Personal financial advisors are also starting to embrace ESG investing, though uptake is slow. Several boutiques exclusively focus on socially responsible strategies. Kaplan Financial, a certification provider for financial professionals, recently launched the Chartered SRI Counselor (CSRIC), a socially responsible investing qualification for advisors. This should make it easier for responsible investors who want to work with an advisor to find qualified help.
5) Impact investing through equity crowdfunding
Equity crowdfunding platforms have been around for about five years. Launched after Regulation Crowdfunding was passed, these platforms let investors buy small stakes in private companies. Prominent players such as StartEngine have caught on to the ESG trend and let investors buy stakes in clean energy and cleantech startups. A new platform called Raise Green is exclusively focused on “green” investment options, such as solar or energy efficiency projects.
6) Sustainable farmland investments
Farmland has recently attracted a lot of investor attention as one of the best-performing asset classes over the past three decades. Several crowdfunding platforms let investors buy pieces of vetted farmland for as little as $10,000-15,000. Some of these platforms exclusively focus on sustainable and organic farmland. For example, the Iroquois Valley Farmland REIT is a restorative farmland finance company that provides financing to organic farmers. FarmTogether, a farmland crowdfunding platform, has committed its farmland to the Leading Harvest Sustainability Standard, which addresses 13 sustainability principles, including soil health and conservation and the protection of water resources.
7) Investing in local communities
The COVID pandemic has rekindled interest in supporting local businesses and communities. Several startups and more established institutions have capitalized on that. Platforms such as CNote and Calvert Impact Capital let anyone invest in Community Development Financial Institutions (CDFIs), government-accredited banks and credit unions that lend to underserved communities. Further, equity crowdfunding platforms like Mainvest and NextSeed let retail investors buy stakes in small local businesses like food trucks and restaurants. (NextSeed reports that 75% of the money raised on the platform has gone to women- or minority-owned businesses.)
The number of options available to investors who want to invest responsibly has never been greater. Robo-advisors and apps offer tools for beginners, while higher net worth or accredited investors can work with an ESG-savvy financial advisor or invest in clean energy startups or sustainable farmland. Socially responsible banking options are also proliferating. In the future, we hope to see more innovation in insurance (where there is only one ESG option) and retirement planning.
Lana Khabarova is the founder of SustainFi, a personal finance site that connects investors who want to make an impact with the right products and services.