By Joshua Levin
You may have voted against U.S. President Donald Trump, protested his policies, and ranted to your friends. Yet most of us are financing him and his agenda. With any typical investment account, 401(k) or pension, Americans indirectly fund their opposition parties and directly finance polarizing activities such as weapons production, private prisons, and climate change denial.
Yet this gap is starting to close. Ironically, Trump’s election may go down in history as the tipping point for the mainstreaming of ethical investing.
It only makes sense. Unless you live in one of a handful of swing states, your finances provide more influence than your federal ballot. And you can “vote” with your money every day.
Yet Nov. 8 was a wake-up call. The Left felt the political door slam shut, and many are seeking new channels to drive change. While it’s too soon for formal studies, we are hearing reports from across the industry of record interest in socially responsible investing (SRI) and related strategies.
This movement is a milestone in a broader trend. SRI has been growing roughly 33 percent year-over-year since 2012. It now represents 1 in 5 professionally-managed dollars in the U.S. The New York Times recently reported that the number of asset managers and individuals who have divested from fossil fuels in some form has doubled in the last 15 months alone.
Unfortunately, the industry has hardly changed with the times. SRI’s infrastructure still looks a lot like it did 30 years ago, when it was built up for religious groups and the anti-Apartheid movement.
This landscape seemed quite reasonable until recently. Neither ethical investors nor Wall Street ever expected SRI to truly mainstream. They were never able to imagine the implications of this project writ large. What happens if everyone applies their values to their finances? What if each investor wants a customized solution? What if most shareholders voted?
This is not a sci-fi future but an emerging reality furthered by Trump and ultimately driven by the inevitable forces of technology, transparency, and demographics.
No one doubts that we are moving towards a world of “glass houses.” Now anyone can access data on carbon emissions for a publicly-traded company. Data on water risk, controversial products and labor policies is rapidly expanding. And we are in a virtuous cycle, where more usage is creating demand for more transparency.
This information may not matter to you. But it matters greatly to the generation who grew up opining on a vastly expanded world of information. Eighty-four percent of millennials believe their money should support companies that reflect their values. They expect to have a voice. And they are on the receiving end of the largest wealth transfer in history -- US $1 trillion per year from baby boomers to millennials.
Accommodating millennials’ demands for customization, values and empowerment can be supported by current technologies. Yet it is stymied by the vested interests of the current financial food chain. The average American investor has up to 16 intermediaries/fee layers between her and the companies she owns. These agents often rely on lack of transparency and prescribed models to maintain their position.
Another justification for financial intermediaries was that, in the past, it never made sense to aggregate and reconcile the views of all individual shareholders of a company. So while the public directly and indirectly owns nearly 80 percent of U.S. stock markets, and the CEOs technically work for and report to us, we feel diffuse and powerless. In the future, however, all the shareholders of Chevron will be having a conversation about what Chevron should be doing.
As you remove intermediaries, and replace them with automated systems that provide transparency and customization, you change the incentives of the market. Our agents chase fractions of profits on a daily or quarterly basis. The actual owners of capital – doctors, lawyers, teachers, journalists, etc. – have far more diverse interests. We are concerned about long-term financial performance, transparency into political lobbying, healthy and safe products, climate change, and more.
In a sense, we are returning to the first principles of investing. If you own a company, you have great power and responsibility. This time around, however, we will take that responsibility together, sharing information and creating movements. Our portfolios can always stay passive, while we each screen out the bad stuff, engage the edge cases and favor the good guys. This is the kind of future we are bringing about at OpenInvest.
With new technology and the new generation, all boats will rise in the sustainable finance world. But to excel, financial advisers will need to evolve how they create value. Institutional asset managers, such as pension funds, need to more deeply engage their constituents. Impact investors should broaden the horizons of impact. And companies will need to change how they behave, compete and report.
Empowering individual investors through technology will ultimately force the public economy to grow a conscience – our conscience – unleashing progressive forces more powerful than those that dominate our current political climate. Trump may be the best thing that ever happened to socially responsible investing. But this will be the election he ultimately loses.
Image credit: Pixabay
Joshua Levin is a Co-Founder and Chief Strategy Officer at OpenInvest, a YCombinator-backed investment adviser dedicated to using technology to mainstream sustainable investing. He previously spent six years at WWF, where he managed the Commodities Finance Program, and has otherwise worked with the Rainforest Alliance, Root Capital, Conservation International in various capacities. He lives with his wife and two sons in Berkeley, CA.
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