Imagining the Future of ESG – Investing Just the Beginning for the Values-Based Economy
Environmental, social and corporate governance (ESG) is not just investments. Our industry is aiming to build a “moral consistency machine.” Finance is simply a natural 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 end investors. ESG will soon graduate from a set of products to a set of 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 help curate custom consumer purchases, political voting recommendations, media feeds – essentially an “ESG Everything Store.” In turn, data from these lifestyle choices can reflect back into your finances and beyond.
The Problem of Moral Distance
The “problem of moral distance” has long vexed the human mind. Our brains evolved in small tribal communities, optimizing for the hyper-local and otherwise seeking to conserve energy. Therefore, we are naturally inclined to favor the people and things around us. As David Hume noted, “The breaking of a mirror gives us more concern when at home, than the burning of a house, when abroad, and some hundred leagues distant.”¹
However, philosophers such as Peter Singer² challenge us to obey our higher moral ideals, not just our instincts. For example, living an ethical life might mean forgoing our daily cup of coffee if that money could be used to vaccinate a child in sub-Saharan Africa.
Our rational minds want to agree with Singer. But we crave the $5 latte. What to do? We typically default to practicality, which favors the near and dear. For example, I know the benefits of drinking that piping hot mocha. But can I be sure my donation saved a faraway child? How much money was siphoned off or misappropriated along the way? It all feels kind of messy, so might as well just get that coffee, right?
Now imagine a whole new scenario: a clear chain of custody is established from my $5 donation to the Zimbabwean child’s vaccine, with real-time reporting on my contribution’s impact.
Imagine further that I don’t even have to give up my coffee. Instead, I simply have to choose one brand over another, and both are equally available and tasty!
How would this change our moral responsibility? Could it even change our instincts? With such God-like capability at your fingertips, why wouldn’t you buy the ethical cup of coffee and feel great the rest of the day? Maybe a video of a happy child thanking you even pops up on your smartphone.
I believe technology is starting to close our moral distance. Not only is it harder and harder to hide from the ills of the world, it is no longer desirable to do so.
Because of the power of capital and consumer pressure to drive social change, these capabilities are emerging first in financial services.
Finance as the Crucible
Between wireless credit card payments, advisory fees, fund fees, and interest payments alone, finance is likely your largest digital spend.
Furthermore, from an impact standpoint, your contributions to Wall Street are high leverage. Global CEOs work for us. As Jamie Dimon, CEO of JP Morgan Chase, reminded us recently in his 2021 letter to shareholders:
More than 100 million people in the United States own stock, and a large percentage of these individuals, in one way or another, own JPMorgan Chase stock. Many of these people are veterans, teachers, police officers, firefighters, health-care workers, retirees or those saving for a home, school or retirement. Your management team goes to work every day recognizing the enormous responsibility that we have to perform for our shareholders.
We are the owners of the world’s most powerful entities. And these corporations are more powerful than most governments. Through our managers, we employ hundreds of thousands of people, cut down forests, plant forests, affect billions of consumers, lobby for policies, advertise to our children, and fund major political campaigns.
Given this incredible opportunity for generating impact, it’s no coincidence that several subsets of the population turned to “Socially Responsible Investing” (SRI). From Methodists to the Anti-Apartheid Movement, activists and the socially conscious have been putting their money where their mouths are for centuries.
Tech-Enabled ESG is Changing the Game
For ESG to mature, it must first emerge from the amniotic sack of “green funds.” As I discussed in Forbes’ Three Unexpected Trends Driving 2021 ESG Inflection, this transformation is already shaping the industry.
From Burlington to the Bay, and Catholic institutions to Halal investors, SRI purists have traditionally represented niche communities. Shareholders lacked the coordination tools necessary to amplify their voices. Instead, they were pooled into expensive, thematic funds that never garnered many assets.
This is rapidly changing. Thanks to new tech infrastructure, referred to as Dynamic Custom Indexing, advisors and investors can now seamlessly customize portfolios to reflect each client's values. Furthermore, clients can have full transparency into their holdings, make changes any time, see their impact, and even 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, there’s no reason why all the shareholders in Apple, for example, couldn’t be having a conversation about what their company should be doing. They can 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
While tech is already striving to optimize ESG for investment vehicles, it 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 Dynamic Custom Indexing chassis, advisors can potentially do something new and useful with this knowledge: bake it into the products themselves. Most clients will ultimately have personalized solutions that reflect where they work, their financial goals and taxes, and what they care about.
Next comes consumer spending. Through software tools such as Yodlee and Quovo, financial platforms can access data on your purchasing patterns. Are you shopping at Whole Foods or donating to specific charities? Technology could make it easy for your advisor to receive nudges around social or environmental issues you may want to see reflected in your portfolio.
What brings it all together is new reporting. The client-first ESG revolution will incentivize companies to aggregate, distill, and transform ESG data for maximum client usability. Quality reporting completes the virtuous cycle: it actualizes the value of all these new capabilities, closes the “problem of moral distance” in investing, and gives clients unprecedented leverage for impact.
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. Most Americans care about things and want to see their ideals reflected in their lives. We’re just too busy to do it.
What if you had a trusty sidekick who 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 – even the news you read and the movies you watch.
Just as the ESG industry cut through the corporate data jungle to organize finance, this mandate will expand – organizing, demanding, commodifying, and ultimately automating the extension of your values throughout your digital life.
From ESG Everything Store to ESG Society
The societal transition to a global, values-based economy will occur through the unification of an ESG taxonomy and currency itself.
Money was the original FinTech – it allows the storage and transfer of value. But traditional currency cannot store metadata, which means externalities are lost with each transfer. For example, if you stole money from an old lady and used it to pay me, how would I know? If I had an inkling, would I still want your cash? This is a petri dish for the problem of moral distance.
Many institutions – mostly non-profits – already won’t accept direct contributions or purchases from industries such as weapons or tobacco. This “one degree of moral separation” is implementable and obvious. But we shouldn’t have to stop there.
We are now in the early stages of the transition to blockchain currencies. The Swedish government is launching and experimenting with e-krona, and El Salvador recently became the first country to make bitcoin legal tender. The star feature of cryptocurrencies is that they maintain a public ledger of all previous transactions. We can all know what was bought and sold previously through the entire life of each digital coin.
In a cryptocurrency-based economy, the Catholic Church, for example, could feasibly reject money that was transacted for sex or gambling within three degrees of separation. Or more practically, there could be a “virtue coefficient” on currency – a weighted average of the morality of all previous transactions.
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. “Your money’s no good here” starts to take on a whole new meaning!
This ESG transformation has begun with finance, our biggest digital spend. It will then 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 struggle to process all of our modern decisions and impacts, big and small. We find ourselves more concerned with a stain on our shirt than a million refugees. As Helen Keller said: “Science may have found a cure for most evils; but it has found no remedy for the worst of them all – the apathy of human beings.”
Moral distance is not an abstract philosophical debate. It’s 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. We no longer live in tribes, but a populous, globally connected world. This affords us tremendous benefits, but also risks alienation and externalized impacts. As technology improves, ESG is positioned to usher in a postmodern era – a digitally-connected stakeholder capitalism that allows us to reap the benefits of modernity while fulfilling our humanity.
Note: References to any particular entity should not be considered as a recommendation by OpenInvest
1. Hume, David. A Treatise of Human Nature, Book II: Of the Passions. 1739.
2. Singer, Peter. Achieving the Best Outcome: Final Rejoinder, Ethics & International Affairs. 2002.