Can a Fintech app allow retail investors to combine returns and impact?
There was a time when impact investors were considered a breed apart from ordinary VCs and angels. Their goal was to find startups with the potential to change the world and generate returns. It was a specialized area.
These days, not so much. The concept of for-profit business is now mainstream, and funding is flowing to startups that tackle issues related to climate, pollution, environmental degradation, food production and sustainable development.
But what about retail investors? Can they take action? Well that’s a bit more complicated. As consumers, we have all become more environmentally conscious. Collectively, we eat less meat, pay more attention to the origin of the products we consume and their sustainable production. And when it comes to keeping the lights on, the demand for renewable energy is on the rise.
This would suggest a parallel enthusiasm of savers for green or impact investing, but it is more delicate. There are funds that allow their clients to invest directly in impact startups through the private markets, but for the most part they cater to high net worth individuals rather than retail investors.
The alternative is to invest directly or through funds in “impact” companies that are already listed on the stock exchange. And with apps making it easier to invest, there’s an opportunity for fintechs that combine convenience with a planet-friendly mission.
A typical example is the British investment fintech, CIRCA5000. Co-founded by Matt Latham and Tom McGillycuddy, the company allows users to invest in publicly traded companies working in areas such as climate, housing and the environment.
McGillycuddy – whose background is in asset management – says there was a clear need for an impact investing platform focused on mainstream investors who had no practical way to invest their own money.
So what does this mean in practice? “Users select a theme – like people and planet – a risk level and an asset type, like ISa or SIPPs,” says McGillycuddy. Additionally, users can select an amount they wish to pay each month.
Investors’ cash is channeled into exchange-traded funds (ETFs), with portfolio companies selected based on a commitment to addressing and solving global issues. “What we’re trying to find is pure games in our themes,” says McGillycuddy.
Is it an impact?
But is this an “impact” investment? When a VC makes an impact investment, the money goes directly into private company accounts and that money can be used for scaling. Simple enough. Investing in a fund made up of listed companies does not have quite the same impact. They have already raised the capital they need through IPOs. So when a fund buys their shares, it is the former owners of those shares who benefit.
“The impact is not as direct as in the case of publicly traded stocks,” admits McGillycuddy, “but it is still significant. If more money flows to publicly traded companies, their stock prices rise, allowing them to raise cheaper forms of capital – debt or equity financing – and this allows them to expand their operations and through their impact on the world” And as he points out, most of the companies in which CIRCA5000 invests are small and mid caps, a traditional focus of impact investing.
For its part, CIRCA5000 seeks to promote awareness of the issues facing the planet. One level, users can find out more about the activities of portfolio companies through the app. At the same time, CIRCA5000 is a registered B-Corp, underlining its own commitment to sustainability. And to coincide with Earth Day, he announced he would offset 100 tonnes of carbon on behalf of pension fund operator, Aviva. The aim was to highlight Aviva’s investment in fossil fuels and perhaps highlight more broadly that oil and gas companies frequently feature in pension fund portfolios.
So is this an attractive offer for retail investors? Has the company succeeded in achieving its goal of combining impact and user-friendly fintech? Well, to date, it has acquired around 170,000 users, with an average age of 31. “Eighty percent have never invested before,” says McGillycuddy.
But is impact investing for the retail market genuine? Well, there seems to be a demand for options that mesh well with the environmental and planetary concerns of investors – especially younger ones. This arguably creates opportunities for fintechs to make the investment process attractive.
CIRCA5000 is not alone in this market. For example, ethical challenger bank Triodos offers an equity and impact equity product for the retail market while UK investment app Nutmeg allows its investors to choose a ‘socially responsible’ theme. More generally, a US survey by the Rockefeller Foundation suggests that demand for impact opportunities is strong. The study reveals that among retail investors who are aware of the impact, 78% already take it into account in their investment behavior.
It’s just the beginning, but it could be a new battleground for fintechs.