The Democratization of Sustainable Investing: Navigating the New World of Impact Options for Retail Investors in the U.S.
Institutional money managers and family offices have been implementing impact and environmental, social and governance (ESG) strategies for quite a few years now. And in that time, the sector has shown impressive growth: According to the US SIF, total U.S.-domiciled assets managed using ESG strategies grew from $12 trillion to $17 trillion between 2018 and 2020. Sustainably managed assets now represent one-third of total U.S. assets under professional management.
As impact and ESG investing have gained momentum, they have also attracted the attention of retail investors, particularly those under 40. A 2019 Morgan Stanley study found that 95% of millennials were interested in sustainable investing. The younger generation’s interest is clearly driven by the growing prominence of climate and social issues, including gender and racial equality.
Providers of financial products and services are responding by introducing a bewildering array of new funds and products available to retail investors. They include ESG exchange-traded funds (ETFs), socially responsible robo-advisors and fossil fuel-free banking – in which a bank pledges to not use customer deposits to fund the fossil fuel industry – among other options. But as encouraging as it is to see so many emerging ESG investing products geared toward retail investors, the quality of the products varies a lot. For instance, some robo-advisor impact portfolios mostly invest in conventional funds despite calling themselves “sustainable.” Several ESG funds are nearly indistinguishable from conventional funds, despite being more expensive. Greenwashing allegations are rife. And many crowdfunding platforms offer high-risk investments that may not be able to weather an economic downturn.
At SustainFi, our goal is to demystify the ESG investing landscape for regular investors. Below, we’ll describe several sustainable investing options available to retail investors in the U.S., providing links to further information that can help investors choose the right products and strategies to achieve their financial and impact goals.
We have found 12 robo-advisors that offer socially responsible investing strategies, most of them introduced over the past 24 months. These include some of the largest mainstream robo-advisors like Betterment, Wealthfront, Ellevest, Personal Capital, Acorns, M1 Finance, Ally Invest and Marcus Invest. There are also ESG-only robo-advisors like EarthFolio and Sustainfolio.
Recent years have seen growing activity in this space, with many prominent robo-advisors expanding their sustainable investing options. In late 2020, Betterment introduced three socially responsible portfolios: Broad Impact, Climate Impact and Social Impact. Earlier that year, Personal Capital announced that its Socially Responsible Personal Strategy surpassed $1 billion in assets, only two years after the strategy was launched. Marcus Invest, the robo-advisor from Goldman Sachs, launched in February 2021 with three portfolio options, including an impact portfolio. And Acorns Invest has recently allowed its customers to switch to Acorns Sustainable Portfolios.
Asset managers are launching more ESG funds to match investor demand. According to Morningstar, ESG exchange-traded and mutual fund assets reached $304 billion in June 2021, setting a quarterly record – the latest in a string of record-setting quarters over the past year. The number of U.S. ESG funds grew to 437 as of June 2021, up from 392 at the end of 2020.
In 2020, BlackRock’s iShares family of exchange-traded funds launched 13 ESG funds to add to 14 existing ESG ETFs. In fact, the biggest ETF launch of all time was the $1.25 billion launch of BlackRock’s U.S. Carbon Transition Readiness ETF. Although some of these funds target institutions, many new funds are trying to appeal to retail investors. For example, newcomer Viridi Funds just launched Viridi Cleaner Energy Crypto-Mining & Semiconductor ETF, the first clean energy crypto mining ETF in the U.S.
Unsurprisingly, there is also a lot of interest in gender and racial equality funds. We have counted seven gender equality funds with nearly $1.4 billion in assets under management, plus a racial equality ETF, Impact Shares’ NAACP Minority Empowerment ETF.
Stock investing apps are also starting to highlight ESG investing themes. For example, the social investing app Public is prominently displaying various ESG themes. This allows their customers to easily discover ESG stocks and funds. The themes include “Green Power,” “Water Works,” “Diverse Leadership” and many others. Stash is also highlighting ESG options through its “Missions and Causes” ETF line-up, which includes themes such as “Combat Carbon” and “Women Who Lead.” Last but not least, Newday Impact is a new thematic impact investing app. Its assets under management reportedly exceeded $200 million in early 2021.
Investing in local communities, particularly poor communities, is also seeing new interest, fueled by the Black Lives Matter movement. Although investing in community development financial institutions (CDFIs) has been an option for retail investors for some time, most investors are still not aware of community investing. However, this is changing. Platforms such as CNote let retail investors invest in pools of CDFIs, starting with investments as low as $5. Other community investing options include the Calvert Impact Capital Community Investment Note, the Reinvestment Fund Note and the RSF Social Finance Note. All of these are available to retail investors.
Equity crowdfunding and other alternative investment platforms are also targeting sustainable investors. Crowdfunding startups Mainvest and NextSeed let investors buy stakes in or lend to local businesses, such as food trucks and breweries. Both Mainvest and NextSeed let retail investors invest with as little as $100. Raise Green is a green crowdfunding platform that offers renewable energy and cleantech projects. Small Change is a real estate crowdfunding platform that targets affordable housing and urban revival, including multiple Opportunity Zone projects. Mainstream startup platforms like StartEngine are also offering investments in renewable energy and cleantech startups.
These crowdfunding platforms are the offshoot of Regulation Crowdfunding, which allows startups to raise money from retail investors. The regulation went live in 2016. As a result of the relatively recent regulatory approval of this form of investing, none of the crowdfunding platforms have been around during a recession. It remains to be seen how the startups they support and the investments they offer will fare during an economic downturn.
Emerging markets investing
Although most ESG and impact investing products for U.S. retail investors do not specifically target emerging markets, these markets continue to be a key part of most sustainable investment offerings. We have found platforms that let retail investors invest in startups located in or targeting emerging markets with as little as $500.
Most socially responsible robo-advisor portfolios also include an emerging markets component, usually an ESG emerging markets exchange-traded fund. For instance, the iShares ESG Aware MSCI EM ETF is particularly popular. It tracks an index that screens emerging markets companies based on various ESG criteria defined by the rating provider MSCI. This ETF can be found in impact portfolios from robo-advisors Betterment, Ellevest, Marcus Invest, Ally Invest, Acorns and Wealthfront.
Investors can also choose fossil fuel-free emerging markets funds, such as SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF, which can be found in Betterment’s Climate Impact Portfolio. The investing app M1 Finance offers an international responsible investing portfolio that includes the Nuveen ESG Emerging Markets Equity ETF – though it’s not 100% fossil fuel-free, it has just one-third of the fossil fuel exposure of a non-ESG emerging markets ETF, such as the Vanguard FTSE Emerging Markets ETF.
Microlending to entrepreneurs in developing countries continues to be popular. The interest in microlending actually predates the interest in ESG investing by over a decade. It can be traced to Muhammad Yunus’ pioneering work with the Grameen Bank. Kiva, the best-known U.S. microlending nonprofit, was launched in 2005 in San Francisco and continues to be active today. Initially created to lend to entrepreneurs in emerging markets, Kiva now also offers small loans to borrowers in the U.S.
Kiva has been particularly active in funding women, who get over 80% of the loans. Of course, Kiva loans are not investments, but rather donations that let investors get most of their money back. (On average, Kiva lenders recoup 96% of their money.)
Alternative investments in emerging markets
Several new fintech platforms let retail investors access alternative asset classes, and some of them are starting to offer emerging markets investments. For example, agriculture tech platform Harvest Returns lets U.S. investors invest in a cocoa farm in Ghana starting with only $10,000, since one of the greatest challenges to Ghanaian agriculture is the lack of access to affordable capital. And the climate tech platform Raise Green is currently offering an investment in Ola Filter, a triple bottom line social business that aims to end water poverty by providing affordable filters in the developing world. (The minimum investment is only $500.)
As these examples illustrate, the landscape for retail ESG investing is growing rapidly, presenting investors with a wide variety of options. Given the growing global focus on climate change and the gender and racial equality movements, we believe that the interest in ESG among retail investors will only grow. There will be many more sustainable investing products launched, both by startups and established players, as the products that have already launched continue to innovate and develop. As investors become more educated about sustainable investing, some of these products will not survive – but others will surely take their place. And as the market for these products develops, retail investors will find themselves in a position formerly available only to their wealthy counterparts, accessing a vast array of quality options for maximizing the impact of their capital.
Photo courtesy of Liza Summer.