Where fintech and ESG meet: How investment apps can drive impact investing
A big shift is underway for fintech startups bringing impact investment into the mainstream, writes Selin Bucak.
Sustainable investing is no longer niche but it is still riddled with problems from transparency to greenwashing, keeping interested investors at bay.
Now, new financial technology companies are trying to address those issues, attracting both venture capital investors and clients who have never invested before.
The rise of impact investing platforms is slightly reminiscent of a few years ago when setting up a robo-adviser was the trend of the day. Currently on Dealroom database there are 14 B2C impact investing technology companies, with a total of €58m raised.
But just as some of the original robo-advisers had to shutter their doors, like Moola and Tiller, not all impact investing platforms will survive.
“We think there is enormous opportunity to create a new category leader in impact investing and attracting different kind of customers to savings and investment apps via tapping into their interest in having impact on issues important to them,” said Check Warner, co-founder of Ada Ventures and a backer of Tickr.
In her opinion, it’s really important for customers to have trust in platforms like Tickr that they are going to do the right thing and be rigorous when they evaluate where their money is going in terms of underlying companies.
Customers will also want to know that companies they invest in through these platforms are being held to account, while the fintech business itself is also fair and inclusive.
It is not just Ada Ventures that has spotted an opportunity in this market. Others are clearly getting behind the concept. After attracting £5.8m from 7pc Ventures, Clim8 raised another £2m from Channel 4 Ventures – the UK’s largest “media for equity” fund - at the start of June. The business is also launching a crowdfunding round on Crowdcube this week.
Elsewhere, Cooler Future raised €1.4m of funding from a group of angel investors and venture capital firm Lifeline Ventures.
Impact investing platforms are not only answering the demand for more sustainable investment options, but they are also helping create an attractive entry point for new investors. For example, Tickr, the platform launched in 2018, says 90 per cent of its customers are new to investing.
“The real hook is they want to use their money to change things for the better and they can do that now through Tickr,” Werner said. “That is something that we think will only continue. Impact investing landscape is going through an iPhone moment in terms of growing so much bigger. It’s still a new area of investing that really came into being in the last 10 years and we think over time it’s not going to be known as impact investing, it will just be known as investing.”
One of the big problems with the traditional solutions offered to investors, in Clim8 founder Duncan Grierson’s opinion, is that they are generally not fit for purpose.
‘They have big tech like Facebook, Amazon, and Alphabet, but if you want to be making a difference with your money that’s not impact investing. They are not actively investing into companies making a difference. Some of those ESG funds even have fossil fuels in them,’ he said.
He added that the reason ESG is not a great tool for impact is because it’s a screening tool.
“Oil and gas might do well on governance and social but not on environmental factors, we believe that’s frankly nonsense and I think a lot of people are being confused by this terminology,” he said.
Clim8’s clients, who can invest with as little as £25, can choose from three portfolios, split based on risk appetite from cautious to adventurous. The adventurous portfolio has 77 per cent invested in equity and 20 per cent in fixed income, split across fund investments and Clim8’s own stock picks.
The group analyses what proportion of revenue comes from its six investment themes and as of February clean tech and clean energy had the highest allocation.
The portfolio is up approximately 38 per cent over the 12 months to 30 April, although because it was established on 21 August 2020, the performance prior to that is based on simulated past performance.
In comparison, the benchmark, based on comparative portfolio composition data made up of 75 per cent MSCI World Index and 25 per cent Barclays Global Aggregate Bond Index, is up about 22 per cent, according to Clim8’s latest factsheet. The figures are net of fees, which include a platform fee of 0.6% and portfolio costs raging between 0.35 to 0.5 per cent.
“Our belief is if you want impact on climate change, you need to be specialist and active,” Grierson said. “The opportunity is vast; we need to invest globally trillions of dollars into these types of companies.”
For Matti Rönkkö, one of the founders of Cooler Future, individuals taking small steps to stop climate change, such as changing their diets, how they commute or recycle, is not going to be enough. People need to make sure the money they have is working towards this goal as well.
But Rönkkö and his partner Moaffak Ahmed, identified two key problems. The first is that the knowledge level of the retail audience, particularly in Germany and Finland, his hometown, is still relatively low, resulting in people just keeping their money in the bank. The second is when you do manage to save, with small amounts to invest, people usually don’t get access to products that have a true impact.
This problem is clear when you search for some of the funds in the Clim8 portfolio on other popular platforms. For example, Hargreaves Lansdown doesn’t have the Tortoise Ecofin Energy Transition, Rize Sustainable Future of Food ETF and the Bluefield Solar Income Funds. While AJBell and Interactive Investor feature a wider range, they also have some gaps in their offering.
Cooler Future is still in the process of launching and the goal is to have a large platform offering a selection of different products.
“Originally, we were thinking of working only with third party products, but we think there is a big gap between how funds are being built and the climate analysis of those. Based on that through our German entity we’ve been building our own investment fund and we’re now waiting for regulatory approval for that,” Rönkkö said.
“The key thing what we want to change is making everyone a climate activist investor. There needs to be a metric and score for climate impact. It needs to be reported, regularly updated and transparent, and this needs to be part of the portfolio building process.”
The platforms are definitely attracting attention, with Tickr having nearly 100,000 clients and Rönkkö and Grierson citing strong interest, but the market has room to accommodate more players.
And just like nine years ago when Nutmeg became one the first robo-advisers to launch in the UK, it remains to be seen which of this new breed of platforms will succeed.