Technology brings values-based investing back to its roots—and into the mainstream

Published on

January 24, 2023

Though their roots can be traced back more than 200 years, environmental, social, and governance (ESG) investing strategies have become mainstream in recent decades. Their increasing ubiquity has also brought a growing understanding of their potential: gone is the idea that you have to sacrifice returns if you choose to invest with your values. In some cases, you might even outperform other funds or benchmarks.

Today’s ESG-related offerings are in hot demand, and technological developments only make them more accessible for investors. The time is ripe to go one step further: mainstreaming intentional values-based investing while offering true personalization at scale.

The evolution of values-based investing

The precursor to ESG began as socially responsible investing (SRI), a values-driven and often faith-based strategy that gained traction with 18th century Quakers and extended through the 1980s Anti-Apartheid movement. Few expected the movement to reach a broader audience due to its niche and moralistic nature that had little to do with making a profit.

Still, as awareness around SRI grew, so did corporate efforts around reporting and transparency. In 2004, the UN Global Compact Report “Who Cares Wins” officially coined the term “ESG” and stated that “Companies with better ESG performance can increase shareholder value.” Though it was one among countless analyses, the UNGCR review represented a broader change: SRI had the potential to evolve into a more adaptable strategy that prioritized financial gains while still integrating environmental, social, and governance values. 

Study after study—and now several meta-studies—have shown that ESG investing doesn’t necessarily sacrifice profits. In fact, companies with strong ESG practices tend to be more competitive, can have greater profitability and better risk controls, and may have the potential to drive strong returns. Thanks to substantial media coverage, this reality has penetrated industry and investor consciousness alike.

A byproduct of this evolution, however, has been a shift away from the founding principles of the SRI movement, which underscored investing in the service of personal values. To win mainstream acceptance, the ESG industry leaned hard into economics and broad-strokes values rather than personalization. As a result, ESG-focused assets are forecasted to reach $50 trillion by 2025—up from about $35 trillion today—and have demonstrated that they can perform better over time, even during market downturns or socioeconomic crises.  

A new synthesis—technology makes investing with your values feel normal

While ESG consciousness is now broad, asset flows remain relatively niche. The primary resistance is in the vehicles themselves—clients very rarely change products or providers, and advisors can be disinclined to bring up different options.

This is why I anticipate the next wave of ESG growth will occur as features, not products. The sustainable finance industry was born of “funds,” but it could truly flourish with the transition to scalable technology services, like better data flow, personalized content, proxy voting engagement, and portfolio analytics.

These technological solutions have the potential to minimize the friction associated with switching to a values-based investing approach. Overlaying values onto existing strategies could take little more than the push of a button, allowing clients to start effecting change faster than ever before.

Another major development in ESG technology is dynamic, personalized sustainability reporting, which is being developed across numerous banks and wealth management platforms. Its introduction could enable clients to see more granular characteristics of their current portfolios and make principles-aligned investment decisions before officially adopting ESG strategies.

Personalized sustainability reporting, combined with streamlined customization, opens up the largest global client segment to values-based investing: people who care about something (that is, nearly everyone), but haven’t yet converted to values-aligned products.

Bolstered by a proven track record of credibility, ESG can now be used in tandem with technology to leverage a new synthesis that harkens back to its origins: broad societal normalization of intentional, values-based investing that prioritizes targeted principles and returns. 

This time, it’s personal

Once values-based investing is both easy and accessible, we achieve two big goals: ESG attains even more widespread adoption, and the pendulum swings back to the industry’s roots in socially responsible investing while still keeping a focus on returns. As factoring values into portfolio considerations becomes more widespread, it could become second nature for investors when making their financial decisions.

Along the way, we also hit a third goal: personalization. By developing a values-aligned overlay as opposed to individual financial products, investing platforms can shift away from cookie-cutter strategies and offer bespoke options that go beyond the funds of the past. With these systems in place, gone are the days of “one size fits all” finance. 

Thanks to foundational support from SRI and ESG, values-based investing has come a long way from its niche beginnings and earned its place as a mainstream strategy. I believe that when a client can customize their existing products on demand, make changes whenever they want, and easily integrate all of their financial activities under one service, we will end up in a new world of investment management—one that is seamless, ethically aligned, and representative of true personalization at scale. 

Past performance is never a guarantee of future results. Some sustainable investing strategies may prioritize sustainable objectives over investment returns.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Investment in securities involves the risk of loss. Past performance is no guarantee of future returns. One cannot invest directly in an Index. Any opinions, estimates and forecasts offered in this document constitute judgment as of the date of the materials and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information contained in this document to be reliable but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only and it is not intended to provide and should not be relied on for investment, accounting, legal or tax advice. OpenInvest may not have verified (and disclaims any obligation to verify) the accuracy or completeness of any information herein that has been provided or obtained by third parties.

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