Tamara Kostova, CEO of Velexa, empowers institutional clients through customized and embedded investing services.
Investment decisions have traditionally been driven by financial returns, but a new era of investors has shifted to values-aligned investing. These investors are not only interested in maximizing returns but also considering environmental and social impact.
After working with a number of financial institutions on implementing investing-as-a-service platforms, I have come to understand not only the requirements of our clients but also the growing demands of the end investor, whether nascent or experienced. Across the board, I’m finding that investors are requiring more visibility about who they are investing in and thinking about why they are investing.
What is values-aligned investing?
Values-aligned investing, also known as “socially responsible investing,” is an investment strategy that seeks to align an investor’s values and principles with their financial goals. Entities engaged in values-aligned investing often try to factor in environmental, social and governance criteria when making investment decisions as well. The goal of values-aligned investing is to achieve financial returns while also having a positive impact on society and the environment.
Values-aligned investing can take many forms, such as:
• Steering away from certain industries or organizations based on specific criteria, such as companies with poor environmental records.
• Investing in companies that create a positive impact on society through renewable energy, sustainable agriculture or fair labor practices.
• Engaging with companies you have invested in to influence their strategy.
• Investing in companies, funds or projects that have specific positive social and environmental impacts.
Investing expectations are changing.
In 2022, Larry Fink, CEO of Blackrock, wrote an open letter to CEOs in which he underlined that sustainable investing is an essential strategy for long-term company survival.
Additionally, consider the 2021 “Sustainable Signals” study by Morgan Stanley, which found that interest in sustainable investing by Millennials hit a record high at 99%. And, four out of five investors focused on sustainable investing despite the Covid-19 pandemic. The top focus for these investments is climate change, according to the report, but 75% of millennial investors—and 50% of all investors—also made investment changes in response to social justice movements.
The Global Impact Investing Network’s 2022 “Sizing the Impact Investing Market” report estimated the size of the total worldwide impact investing market at just under $1.2 trillion. This is the first time the estimate has hit the $1 trillion mark. GIIN CEO said this was a “significant psychological milestone for the industry.”
Whether you’re a retail investor or a large-asset manager, the expectation has changed: Values-aligned investing is growing, and I’m observing that investments that result in no positive impact are becoming the minority.
Implement values-based investing the right way.
Of course, financial institutions should not buy into this movement simply because it’s a trend; you must respond in a way that is authentic and aligned with your own values. In fact, this will help ensure your initiatives are sustainable and positively impact the bottom line in the long run.
Keep in mind that your product strategy around values-based investing should not conflict with the strategy of your financial institution itself. Otherwise, it will appear as if you are ESG-washing, as opposed to intentionally making impact-driven strategic decisions. You can develop robust frameworks and policies that incorporate ESG factors into your company’s investment and operational processes. This involves conducting thorough research and analysis to identify companies and projects that align with the values and principles of responsible investing.
Next, when beginning the process of offering specialized products and services tailored to the growing demand for values-aligned investments, such as ESG-focused funds, impact investing portfolios and green bonds, remember that you don’t have to do it alone. For example, you can engage with industry experts to help you understand the existing landscape. You can also conduct deep customer inquiries to better understand the specifics of what your clients are looking for.
In my experience, not only are companies starting to measure their impact more diligently, but also I’ve observed increased availability of information about the social and environmental impact of companies. Several platforms now exist that shine a spotlight on companies’ performance in climate change, human rights, corporate governance, social impact and other topics related to social responsibility. Here, it is important to come back to the investing sophistication and knowledge of your clients. If they are more nascent, it makes sense to provide a generalized ESG score, but for more advanced traders, they might want details such as annual reports and specific numbers.
The future is about more than returns.
While values-aligned investing is not the only way young people and next-generation investors are making decisions, it makes so much more of a difference than many financial institutions might expect. The key is to give end investors enough information to be actionable but not overwhelm them. By keeping the best practices above in mind, you can ensure your financial institution is getting started with values-aligned investing the right way.
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