Lessons from meme stonk mutualism

9 Aug 2021 | IPCC sounds climate 'code red'; direct indexing signals new direction for ESG investors; DWS pivots amid alleged internal challenges. Plus, Robinhood's IPO forces reflections on finance's social role.

🌡️ Climate change is officially “code red for humanity.” The UN’s landmark climate change report warns limiting global warming to 2°C is “beyond reach” without rapid large-scale emissions reductions. Worst-case scenario: a 15m sea rise by 2300.

🛢️ And yet: The oil & gas industry is stepping up SEC lobbying efforts to dilute looming rules that mandate climate change disclosures, reports the FT, “in a sign of the fierce corporate resistance to a tougher new US environmental regime.”

🚨 Net zero targets are dangerous distractions, says Oxfam, which claims land-hungry net-zero schemes could force an 80% rise in food prices, creating more hunger, while rich nations and corporates continue “dirty business-as-usual.”

👩‍💻 Direct indexing is here to stay. Bespoke portfolios, long the reserve of wealthy investors, are finally accessible to a broader audience thanks to new technology. Great news for investors seeking a sustainable twist on established indexes.

💸 Also good news for those worried about the dominance of passive products with no sustainability lens. While Morningstar finds Article 8/9 funds could reach half of total assets in a year, active funds still account for the lion’s share of assets.

🕵️ Where can ESG-minded investors find opportunity? According to Manulife, 1. private equity, where environmental stewardship yields value, and 2. emerging markets, where investors can best mitigate global social and environmental risks.

🗞️ The perennial challenge of investing is that past events—the only basis for analysis—are no guarantee of future results. For sustainable investors, the problem is compounded as there’s not much past to lean on, writes Ardea’s Tamar Hamlyn.

🔬 A dearth of publicly available data is prompting investors to turn to new sources. MBH Corporation finds 89% of investors think employee satisfaction platforms (such as Glassdoor) yield crucial information on the validity of firms’ ESG claims.

🚀 DWS is adding an ESG filter to nine Europe sector ETFs. Hopefully the house is in better order than claimed by a certain ex-sustainability head—though setting the bar at a minimum MSCI ESG rating of CCC doesn’t scream best-in-class.

🧐 Why? MSCI’s scoring system is comparative: each company is rated relative to others within its sub-industry. That type of approach is why Exxon and BP get a BBB. And why BAT and Philip Morris make it into the Dow Jones Sustainability indexes.

Robinhood: A catalyst for social finance

The trading app that brought investing to the masses has now put its shares in the hands of the masses, becoming party to the phenomenon it fuelled.

On the day of its listing, Robinhood stayed true to its namesake. The pioneer of commission-free trading—and poster child for the democratisation of investing—sold as much as 25% of its shares to retail investors, defying a longstanding Wall Street tradition of allocating shares to institutions. (Typically, companies tend to allocate less than 10% of their shares to individuals, most of whom are HNW investors.)

The IPO was a symbolic and inevitable milestone for Robinhood, which served as a conduit for the recent retail investing boom: a boom virtually synonymous with pumping meme stocks like Gamestop.

Those trades were never just about making money. They were also a concerted effort to admonish hedge funds shorting companies on the expectation of their decline. Time characterised the collective push by online investors as an effort to “fight back against a system they feel deserves a reckoning and to unleash general chaos.”

Don’t fall into the trap of dismissing that chaos and the anger it represents.

The decade that followed the global financial crash was the longest bull market on record. While stock markets broke through stratospheric heights, however, wages stagnated. Income inequality, already at a level unprecedented in modern history, only accelerated in the fallout of COVID-19. The relative trajectories of the stock market and real-world economy were mirrored in the growing disparity between the haves and have-nots. In Robinhood, the latter found an ally.

Robinhood is thus a symbol for a very ESG issue: social equity. Positioned as the antithesis of traditional finance players, the app-based, commission-free trading platform promises social and financial democracy.

The question is: does it actually meet those promises?

Our analytics show that, yes, Robinhood, like most retail and active brokerage firms, scores well on SDGs 8 (Decent Work and Economic Growth) and 9 (Industry, Innovation and Infrastructure). In particular, academic research finds such services support entrepreneurship, innovation and productivity.

But it’s not all good.

Free it might be to the user, but 46% of Robinhood’s revenue comes from commissions paid from options trading market makers. As a result, it has an incentive to drive its users into speculative and risky investing patterns—something of which incumbent asset managers, whose higher fees come with financial expertise and longer-term investment horizons, cannot be accused.

It might be less popular on r/WallStreetBets, but traditional investment management scores much better against SDG 8 and 9. What’s more, the nature of long-term investing means the sector contributes positively to SDG 1 (No Poverty), SDG 4 (Quality Education), and—ironically—SDG 10 (Reduce Inequalities).

Retail investors have been ignored for too long. Asset managers who continue to overlook the market are not only short-sighted, given clear evidence of demand, but also failing their social responsibilities.

The solution to financial inequity shouldn’t be speculative trading at a market peak, but pragmatic long-term investing: the type that happens to solve institutional injustice on a global, rather than individual, level. As Scott Galloway points out, “Robinhood’s activities look more like the dispersion of financial risk than the democratization of finance… Robinhood makes more sense in the context of gambling than investing. Its business model depends on active traders, but research shows the more active traders are, the more money they lose.”

If the financial sector is to embrace retail investors, however, barriers to entry must come down and education must go up. The good news is, thanks to new technologies, there are now answers to legacy issues of both access and education.

The recent rise of direct indexing solves some of the problems that have historically hindered mainstream access to investing: it allows investors to get the best of both worlds by capturing market performance while also tilting investments to personal risk and sustainability preferences.

The rise of the internet and shared information, exemplified by platforms like Reddit, presents asset managers with an opportunity to educate, inform and engage with a new audience. And, unlike Robinhood, the BlackRocks of this world have both the means and incentive to educate end-investors on extra-financial issues such as sustainability, rather than simply spurring them to create more deal flow.

While it has shown that there’s a voice that needs to be heard, Robinhood is missing the appropriate tools to speak to it. For the broader asset management industry, addressing retail investors isn’t just a commercial imperative. It’s an ESG one.

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