By Saad Zariff, VP of North America, Wahed
It’s no secret that the last two years’ events have affected the way Americans manage their money. For many, historically low unemployment rates, soaring healthcare costs, and rising debt led to evolving their money management to find financial stability. Others discovered that the ability to work remotely offered greater flexibility in how they live and spend their money. It also provided new freedom to focus on growing their wealth.
However, regardless of the type of impact on their finances, the pandemic has caused many consumers to reevaluate how their financial decisions impact the world around them. While historically, investments were solely based on return, today’s investors are looking for more: to make financial gains and use their investments as a vehicle to drive long-term societal changes. In fact, a recent study our ethical investing firm conducted found that 80% of those surveyed say that since the onset of the pandemic, investing in ways that align with their values are at least ‘fairly important’.
As such, Environmental, Social, and Corporate Governance (ESG), Socially Responsible Investing (SRI), and other methods of impact investing should be considered a permanent and evolving sector of the financial industry. As we head into the new year, here are three impact investing trends to expect well into 2022 based on our recent analysis of the market.
- Positive Impact Returns Become as Important as Financial Returns
With social injustice set under a microscope over the last 18 months, Americans have collectively reevaluated their societal, cultural, and environmental impact on the world. And as a result, the intersection of money and meaning has blurred. Many retail investors are ready to support causes they believe in by investing in organizations that are directly aligned with their values.
It’s become so crucial that some investors have gone as far as prioritizing their values over their returns. In our study, over 50% of surveyed retail investors said they’d be willing to get less return if they knew the company they invested in aligned with their views and beliefs. However, modern day impact investing has proven that you can now drive both impact and returns. In fact, 43% (and 54% of Millenials) of those surveyed believe it’s now possible for socially responsible or ESG investments to outperform the market.
This directly aligns with other recent reports, which have found investors no longer have to sacrifice returns when investing in an impactful way. Of course, this can vary by which aspect of ESG or SRI that a fund is focused on. For instance, early analysis has shown a focus on the ‘governance’ aspect of ESG has a more immediate impact on short-term returns, while using the ‘environmental’ criteria for screening is more of a longer-term investment.
- Demand Increases for Simplifying ESG Investments
While interest in values-based investments has grown significantly over the last year, the ability to make such investments remains relatively inaccessible and complicated. Just 35% of surveyed consumers put money into an ethical or socially responsible investment in the last year according to our analysis. This stark difference between desires and actions illustrates that consumers still struggle to find the right way or platforms to invest in a values-driven way.
People want and need a simplified ESG solution. Retail investors are looking for an all-in-one solution that facilitates banking and (ethical) investing needs, especially when using digital solutions like app-based neobanks. Half of respondents said they would be more likely to use a digital wealth management app on their phones if it offered both investing and banking options
When it comes to the criteria for selecting values-based investment solutions or services, it’s clear that there are specifics that investors are looking for. No or low annual fees (65%) was first on respondents’ minds, followed by no charges on transactions (39%), the credibility of the financial institution (31%), and a low initial deposit 29%) needed to open an account.
- An ESG Ceiling Hinders Crypto’s Growth
Cryptocurrencies have become the finance topic du jour among both media and consumers over the last few years. In May, the total crypto market topped off at $2.4 trillion, up from just $200 billion in 2019. And while taking a chance on crypto is enticing to many for it’s convenience, excitement, and alternative to the traditional financial system, many retail investors may soon find cryptocurrencies to be at odds with their desire to invest in a socially responsible manner.
Over two-thirds (67%) of retail investors told us that investing in cryptocurrency is not socially responsible. This is likely due to the enormous energy consumption and the wavering government standards that come with cryptocurrencies. According to the University of Cambridge, bitcoin mining consumes 121.36 terawatt-hours a year. That’s more than the consumption of Google, Apple, Facebook, and Microsoft combined.
However, that hasn’t stopped younger investors from increasing cryptocurrency investments during the pandemic. In fact, 23% of Millennial respondents to our survey said that cryptocurrency was the wealth investment strategy they grew the most over the last 24 months — outdoing the increase in dollars they’ve put into their savings, the stock market, and IRAs.
As cryptocurrency continues to take a greater weight of portfolios, ESG funds with exposure to the crypto market will need to be more transparent with their screening methodologies to adequately decide if it can be considered ESG friendly. For instance, while investment in coins that require mining and energy consumption may not be a fit for an environmentally focused ESG fund, investments in the broader blockchain ecosystem could certainly be a fit for more socially focused funds.
Impact investing is now playing a major role in the economy, from how organizations are governing decisions to how investors analyze the actions their money enables. As we look to 2022 as a source of continued economic growth after the residual downfall of the COVID-19 pandemic, there is no doubt that this type of values-based investing will continue to be a top priority for many veteran and first-time investors.
Saad Zariff is Vice President of North American at Wahed, a financial investment company that aims to advance financial inclusion through accessible, affordable, and values-based investing. Before joining Wahed, Saad held positions at Azzad Asset Management, Advisorshares, and Morgan Stanley. He has over 15 years of experience advising individuals and institutions on investing their assets in faith-based and Socially Responsible Investment products. Saad has a degree in Accounting from the London School of Management.