Greenwashing has become an issue in finance, especially within the investment sector.
According to many scientists and climate experts, the world is on track to environmental destruction with a one-way ticket. To avoid the worst of these issues and possibly reverse the effects of the human carbon footprint, an agreement was signed by 196 countries to limit global warming by under two degrees.
To do this, emissions reduction was pledged, with many setting the goal of becoming carbon neutral by 2050 (many jurisdictions and private companies have adjusted this goal to 2030).
Finance is seen as a significant factor in reaching this goal. Multiple financial institutions and fintechs are now including carbon data tracking within their products to raise awareness of the impact of consumer spending. Investment flows into companies that support “greener” processes could encourage more development within emission reduction.
ESG investment not always sustainable
ESG funds have shown considerable growth in the past few years. According to Morningstar Direct global ESG fund assets increased to $2.74 trillion at the end of 2021, up from $1.65 trillion in 2020. Although the reasoning behind this investment is variable, Morgan Stanley found that .50% of all investors and 75% of millennial investors have made or plan to make investment changes in response to social justice movements.
The term “ESG” has become a buzzword many companies use to promote a more sustainable image. The issue with ESG is the current scoring system doesn’t necessarily equate to sustainable investment.
Originally used to assess the impact of changing environmental, social, and governance conditions on the business, rather than vice versa, even fossil fuel companies can gain high scores and be included in ESG-focused funds.
A kick in the teeth for investors who believe they are using their money to affect climate change positively.
“If you look at some ESG, labeled ETFs, for example, it’s shocking what’s actually in them when you dig a little deeper,” said Charlie French, co-founder of Etcho. “That’s a big driving force of what keeps us motivated. Every time we spy something like that, we want to develop more transparency around it.”
Sustainable investment fintech, Etcho, has found a way around the dubious “sustainability” of ESG funds. By researching companies’ data from multiple sources and considering revenue sources, they formulate their scoring system to highlight the facets of each business. Other information, such as PR issues and controversies, is also considered.
“We get around it by looking at the holistic view of what’s going on rather than just pinpointing one sector,” French continued.
Investments consciously aligned with personal goals
Users of the Etcho app can set their own sustainability goals and enter information about their investments. They will then be shown how their investments match up to their preferences.
The focus of fintech is conscious investing. By providing data for investment in many different sectors, they hope to improve understanding of the level of impact each investment makes.
“We think if people see the negative impacts that investments are having, maybe they will choose a different investment route,” said French. “We want to give people an overview of what they’re invested in and understand it so they can make informed decisions.”
Isabelle is a journalist for Fintech Nexus News and leads the Fintech Coffee Break podcast.
Isabelle's interest in fintech comes from a yearning to understand society's rapid digitalization and its potential, a topic she has often addressed during her academic pursuits and journalistic career.