Leeway: Factoring ESG into FinTech

What does ESG mean?

ESG stands for environmental, social, and governance. When we talk about ESG factors, we talk about the impact a company has on the environment and on society, but also on the regulations and management practices within the company.

You can approach all of these factors from a quantitative as well as qualitative angle. At Leeway, for example, quantitative data is a big factor. This includes things like emission, waste, pollution, taxes, and investments into the environment and the common good. We also look at information about certifications, implementations and methods of companies.

Why do ESG factors matter for investment decisions?

Firstly, there is growing evidence that suggests that ESG factors should be integrated into investment analysis and portfolio construction to achieve better return in the long-term. Institutional investors are increasingly applying ESG criteria to their analysis process to identify risks and opportunities. These developments are based on an updated understanding of the fiduciary duty.

For companies like Shell, the finiteness of oil reserves also means the finiteness of a viable business model and therefore income – if no sustainable approach is found (environment). In cases like Wirecard, scandals in the company’s management caused the stock to collapse completely in a few days (governance). Even in less severe cases, companies often face fines and negative ratings, which can depress the value of a share for a long time.

Secondly, we have to keep in mind that we fund a company’s operations with our investment. Even more so: through an investment we own a tiny part of the company. It literally „becomes our business“. That means that we have a responsibility that goes beyond returns. As investors we should ask ourselves, which companies we want to support with our money.

How do I find sustainable investment opportunities?

In short? A lot of research.

At the moment, investors would basically have to look at company websites and publications, annual reports, sustainability reports, news, and more to make a well-informed decision. Even if you decide to invest in an ETF or fund, you should take the time to assess their investment criteria – often you might be surprised by the kind of companies that make it into an investment product labelled as „sustainable“. This is why we suggest creating your own portfolio instead. To support our users with this task, we have invested a lot of effort into the development of our ESG-score. With this score we want to relieve investors from hours and hours of research.

Personally, I also enjoy looking out for interesting stories and new sustainable business models to support. Afterwards I would analyze the opportunity based on the company’s financials and make my decision.

Which criteria are applied to categorize the practices of a company as sustainable?

The greatest problem in the field of sustainable investment is currently a lack of standardization of non-financial reporting and analysis. Even though there are certain standards, certifications and norms, many companies as well as funds, etc. select their own criteria for reporting or analysis and selection of stocks for a portfolio. The lack of standardization goes hand in hand with a lack of transparency – it becomes very difficult to make a well-informed, responsible investment decision.

How sustainable are exchange traded funds (ETF)’s and funds?

As mentioned above, this differs from case to case. If you really want to invest into a fund or ETF, I would advise to take a deep look into their investment criteria. However, I know that many people, including me, prefer not to give away that control and to invest directly into a selection of companies they would like to support.

Is sustainable investment a trend or will it stay around?

I think we can all agree that sustainability and social responsibility will become increasingly relevant in all areas of our lives – the way we live, the way we eat, the way we commute, and the way we invest our money. The responsibility of protecting our environment as well certain resources, and reversing or minimizing damage will become more urgent. And with progressing digitalization and globalization social injustices and governance scandals will become public even faster.

So far, our ESG-score has been an important door opener – even to large institutions, like international banks. These institutions recognize the relevance of automated ESG analysis but have not found the perfect solution yet. If we look at cooperations and funding in the fintech segment, we can still observe a focus on payment, mobile banking, etc. However, based on our discussions with banks, funds, and research houses I am certain that especially the combination of AI and ESG will become increasingly relevant for institutions.