Technology can help uncover credible ESG investment opportunities
The environmental, social, and governance (ESG) movement has accelerated quickly in recent years, with many investors now looking to embrace sustainable investing practices. According to Morningstar, money invested into ESG funds rose to $71.1 billion between April and June 2020, pushing the total market value above $1 trillion for the first time.
The total market value of ESG fund investment has surpassed $1 trillion for the first time
This is also just the beginning. A growing number of investors will begin to re-think their portfolios as topics like sustainability and climate change continue to dominate the news agenda. However, while this may seem like good news on the surface, there are concerns that ESG investments are at risk of becoming overvalued. Some have gone too far as to suggest a “bubble” could emerge, if overeager investors drive asset prices well above their actual value.
Just like any trend in the investing world, ESG isn’t immune to the dangers of overvaluation or misinformation. As such, investors need to avoid being swept up in the rising popularity of sustainable funds and ensure that any investments remain calculated and income-generating.
How can financial technology ensure ESG principles are upheld?
Greenwashing is one of the unavoidable pitfalls of ESG. How can investors be sure that a fund’s green credentials are everything they declare them to be? With the growing demand for funds that demonstrate sustainability and ethical practices, the risk of ESG credentials being oversold also gets higher. This is where the use of technology combined with an active investment strategy is critical in dodging the occasional, yet unfortunately inevitable, attempts at greenwashing to bolster the ESG credentials of a particular asset.
Investors and their advisors need technology to help cut through jargon and superfluous ESG measures to understand the reality of these investments, and to understand whether they truly deliver on the ideals of ESG. Instead of having no choice but to trust company-reported data, investors can leverage fintech to unlock data that is consistent, forward-looking, robust, regularly updated, and independent.
With no single, definitive standard for measuring ESG credentials and often complex data (a high “rating” in one area might cancel out a lower “rating” in another, but which is more important in the overall scheme of things?) it’s not that simple to make the most calculated decisions. The use of technology such as AI and machine learning can offer much more credible analysis and truthful results, giving us a more accurate view of a fund’s real ESG rating.
Fintech is democratising investment by lowering the barriers to entry, transforming the investment process and making it easier for investors to hold companies to account on their ESG promises. Technology is able to increase people’s confidence in the realities of ESG funds, empowering investors to vote with their feet (and their pockets), when they discover the investments that initially seemed to offer the perfect ESG-related performance aren’t so green after all.
Fintech professionals can help to ensure ESG remains sustainable
For all of these reasons, the fintech industry has a part to play in boosting the transparency of decision-making when it comes to ESG investing. Technologies and data-led solutions can provide extraordinary value here, as they can help investors and their advisers make the most informed decisions and mitigate risk.
At the same time, regulators and technology providers are also creating a better environment for investors interested in sustainability. For example, the UK Government recently implemented reforms that give pension funds an explicit responsibility to integrate sustainability into their investment approach. Steps like these will provide more opportunities for investors to meet their own sustainability criteria, while ensuring that the ESG agenda continues to move forward.
And let’s not forget that underneath the “label” of ESG is something that’s vitally important to the world we live in. As well as protecting investors, avoiding an ESG bubble will help to ensure that responsible businesses are given precedence over their less scrupulous competitors.
