ImpactAlpha, Aug. 15 – Last month, Morningstar reported that inflows into sustainable mutual funds and ETFs in the first six months of 2019 were$8.9 billion, greater than any full year in the past. The leaders were BlackRock, Calvert and Vanguard.
In the same month, Swell – an impact/customization-focused public equities platform that was launched in 2015, and backed by Pacific Life Insurance, announced that it was shutting down.
Commentators have linked Swell’s failure to a lack of appetite among millennials, Swell’s mid-cap focus or general challenges of scale while working with retail investors. There is more to the story here, if we look beyond Swell at the Class of 2015. Swell, Ethic and OpenInvest are each technology solutions providing customized public stock portfolios to various types of investors as alternatives to mutual funds and ETFs.
Retail platforms for sustainable investing struggle to differentiate themselves – and to attract customers
Looking at the information available in latest regulatory filings, none of the three had been able to break the $100 million mark, despite targeting different types of clients (retail, advisors and institutions) and different approaches to investing in stock markets (human-picked portfolios to index-replicating algorithms).
(Editor’s note: A previous version of this article incorrectly stated that many of the platforms had been operating for more than five years. Also, Ethic’s assets under management were $170 million as of June 30th, 2019. The firm announced in July that it had closed another round of financing, with prominent investors such as Fidelity Investments and Ashton Kutcher’s Sound Ventures. OpenInvest has raised capital from investors such as Andreessen Horowitz and QED Investors in previous years.)
So, what have been the missing ingredients in this recipe for uber-customization and technological advancement? Two issues stand out: messaging around impact and winning over advisors.
In an ImpactAlpha article earlier this year, a representative from OpenInvest shared that “personalization” as their primary message has not worked as well as they expected. The problem might lie in linking personalization of your portfolio to measurable impact in the world, instead of values alignment.
Customization platforms have often leaned into the “impact” narrative rather than focusing on other aspects such as transparency, tax efficiency or values alignment. Some examples of headlines and impact reporting/messaging show how “leaning in” has been the choice:
- “OpenInvest Challenges Socio-Economic Inequality; Launches Racial Justice Cause”
- “OpenInvest Launches First Impact Investing Category To End Human Trafficking”
- OpenInvest proposed “stopping illegal deforestation” as an overlay on portfolios.
- “Swell Lets You Invest A Little Cash In Solving Big Problems”
- “Swell Investing: Building A Portfolio Of Companies Make The World A Better Place”
Meanwhile, Ethic’s 2018 impact report links growth in their assets under management to lower emissions in the world, framing it as “impact in metric tons of carbon saved.”
Dealing in secondary markets with trillions of dollars deployed, the validity and size of the “impact” of any single public market investor’s decision to invest or divest on the public companies’ behavior has been a contentious issue. The exception has been shareholder engagement, where smaller investors have had outsized impact on large public companies in David v. Goliath moments. It is important to note that engaging as a shareholder requires holding stocks in companies you disagree with, rather than excluding them from your portfolio.
Retail investors are worried about impact, not financial returns
It makes sense to keep the messaging simple and impact front-and-center, in line with the company’s mission and aspirations. Yet impact in public markets is ultimately a challenging message to work with because of its nuanced nature and refutability.
As they move forward, these platforms need a new leading message that is easier to deliver. It could be usability, transparency, reporting, values alignment, tax efficiency or a host of other positive features at which such platforms excel.
Becoming a business tool for advisors
In June 2018, Swell announced that it had launched an advisor-focused product with Folio Institutional, a platform used by over 450 advisors. OpenInvest, in May 2019, launched its own advisor solution, Optimus, to help expand its reach. Ethic never marketed to retail investors, but in July 2019, announced that Dynasty Financial Partners, a service provider to advisors, had partnered with them for Dynasty’s 50 independent advisor firms.
Will advisory firms help mainstream these customization platforms? While the answer for Swell is already out, client demand (of all things) might be standing in the way of the future: In an 2019 Financial Times report on retail impact investing, retail investors shared through a survey that the “Ability to offer online/robo tools to manage investments” was the least important (of 5) quality they would consider while selecting an advisor for impact investing.
There are other compelling reasons advisor might consider adopting technology solutions to upgrade their practice – offering tax-efficient solutions, ability to engage clients, making customization available at lower account sizes, differentiating from competitors and so on. Platforms have increasingly positioned themselves as advisor-friendly tools, but will be competing against existing customization solutions that might be less technologically advanced, as well as behemoth fund managers.
There are hundreds of ESG and impact mutual fund and ETF solutions in the market that advisors can choose from, and mix and match for customization. Some of these funds have more than $1 billion in assets and over a decade’s track record. “Nobody ever got fired for buying IBM” will continue to be the key obstacle to overcome.
Whether OpenInvest and Ethic will have more traction with the financial advisor community remains unclear. Some of the early news seems promising. Even with advisors onboard, implementation and moving assets will continue to be a challenge as it is likely that these solutions are, at least initially, reserved for a limited number of clients and for smaller allocations.
If we zoom out from the Class of 2015, there’s a lot happening in the world of impact investing. Other technology platforms, like Just Invest (founded in 2016), that have had more success raising assets. Several large asset managers have embraced customization as a service they provide. There are other emerging solutions for retail investors outside of public equities—from banking (Aspiration and Good Money), to private debt (CNote) and even in robo-advising (Ellevest, Vestive).
Cracking the business model and competitive advantage puzzle will continue to be the main challenge as these solutions look to find their place among a long list of alternative options in the impact space, and not to forget, an even longer list of traditional solutions.
Hummayun Javed is an investments manager at Align Impact.