Five ESG & Tech Trends that Shaped 2021

In the final episode of the ESG & Tech show this year, the focus was on the five key trends that  defined 2021.

Here is a snapshot of what we discussed:

1.     Climate fintech

I think 2020 was the year that truly wanted to “shop local”. There was sense of community, wanting to help small businesses through a difficult year and our relationship with space changed dramatically during lockdown. However, with COP26 and a plethora of other things, 2021 could well see the embryonic trend of “climate fintech”. This concept is centred around using our everyday spending to help the environment. For example, in August, first event sustainability-focused consumer financial services provider in the public markets happened when, Aspiration announced plans to go public through a special purpose acquisition company (SPAC) merger that valued it at $2.3 billion. In the company’s latest press release, it noted that it’s year to date September 2021 Revenue of $62.1 Million Compared to $9.3 Million for the First Three Quarters of 2020. This represents a 570% Year-Over-Year Increase. There is such a big business opportunity for companies who can align an environmental objective with people’s everyday life. At Sustain Social last week, Randeep Somal quoted “Bloomberg New Energy Foundation (BNEF) highlights that between $92 trillion - $173 trillion required in spending to reach net zero. The UK alone is £1.5 trillion.” They are phenomenal numbers!

2.     Robo Advisor

In a previous episode, I explained at length how Robo Advisor works. In essence, you fill out a questionnaire and then an algorithm puts forward a portfolio based on the insights you share about yourself. It generally populates the portfolio with ETFs, but the whole idea is that the algorithm does the stock/fund picking for you. In 2021, we’ve seen some Robo Advisors incorporate an ESG angle into them and even seen some to focus solely on the theme. For example, Earthfolio is a sustainability Robo-Advisor. Personal Capital is a US-only RoboAdvisor that chooses ESG stocks. Ellevest specialises in companies owned by women and under-represented communities. For me, this represents two key points. The first is that it is clear response to consumer demand. The second one is that when you put your Robo Advisor in the driving seat of making decisions for you, it will continue making those decisions until you tell it otherwise. As a result, the more money that is added to these Robo Advisor accounts (which is predicted), the more ESG-based decisions will be made.

3.     Demographic Drivers

We often hear about the loud voice of Gen Z when it comes their passion for sustainability. However, when it comes to those who take these considerations into account when making investing decisions, according to a recent CNBC piece “About one-third of millennials often or exclusively use investments that take ESG factors into account, compared with 19% of Gen Z, 16% of Gen X and 2% of baby boomers”. If we stop there for a moment and then question the likelihood that the influence of this age group is going to grow over time. Naturally, with inflation and the growing need for talent, we might say that it’s highly likely that their wages will rise over time, but what about their propensity to invest a greater share of their income? Bloomberg considered this from the point of view of student debt, home ownership and retirement planning. In particular, the piece quotes “48% of 26- to 39-year-olds are homeowners today compared with 52% in 1989,” 86% of millennials have some kind retirement plan, compared with 73% of boomers at their age” and “Millennials have almost twice as much debt as their parents did at their age”. Does this suggest then those millennials are poorer than their parents? Instead, I think it’s worth considering a different angle. Millennials have invested more in their ability to be financially stable and wealthy looking into the longer term. They have been in education longer, have put money into their pension earlier and have rented in areas closer to the higher-paying urban jobs to accelerate career progression. Therefore, when you put this as well as their predilection for ESG investing together, it’s a powerful combination.

4.     Data Data Everywhere!

Over the past year, I’ve noticed more and more ESG information available through my fintech apps and websites. If I log into my stockbroking account, I can see the sustainability measures of my portfolio, the exposures of the each companies to non-ESG areas and I can make decisions accordingly. If I look at the iShares website to evaluate my ETF choices, I can also see ESG rating from a variety of perspectives. Companies are now being pushed into being more transparent and there are greater expectations set for this purpose both from a regulatory as well as cultural point of view. One of the key things that stood out a mile from the Sustain Social conference was that some data providers disagree with each other. Some companies say that a certain stock has positive ESG KPIs while others offer a very different analysis. Where is one to turn in this situation? On another note, there is growing cynicism that certain companies aren’t as pure or green as they purport to be but simply want to be seen that way so that they can absorb the money that is looking for this sort of home. The European Union taxonomy is an example of a supra-national effort to harmonise this grey area.

5.     Differing costs of capital

Based on all the above, investors (both retail and institutional) have become more discerning. They’re attributing different costs of capital to different assets. For example, the FT points out a 0.05% “greenium” i.e. green bonds are 5 bps cheaper when compared to traditional bonds. However, what happens when it’s more complex than what a single metric can demonstrate? For example, a defense company is likely to be involved in activities that harm human life and naturally, this is “ESG bad”. They might also be working on cutting edge cyber activities to prevent harmful hacks and preserve credibility in the virtual systems that we use progressively more and more… and that’s “ESG good”. The financial markets are a web of intricate interactions and of course, the human mind wants efficiency but when it comes to packing a company’s environmental, social and governance reputation into a number, one would want to do so with care.

2021 certainly had lots of interesting experiences, new developments and innovative technologies that crafted it to be the year that was. With these five trends guiding the ESG & Tech future path, let’s see what 2022 has in store!

Sign up for our newsletter here to keep up-to-date on future events.