How ESG-friendly is P2P?
Environmental, social and corporate governance – or ESG – has become an increasingly important metric for investors seeking to do good with their money.
ESG has become shorthand for ‘ethical’ investing, or investing in a way which has a positive environmental (E) or social (S) impact. As for the ‘G’ in ESG, it is generally used as an indicator of a company’s transparency and willingness to disclose key internal statistics, even if they aren’t always positive.
Over the past few years, peer-to-peer lending platforms have become increasingly mindful of ESG principles, and many would claim that they are making significant progress in this space. Thanks to strict regulation, P2P platforms already tend to be extremely transparent with data such as default rates and lending volumes. Meanwhile many platforms would claim that they are doing a social good by providing funding to underserved consumers, business owners and property developers. Furthermore, P2P lenders such as Abundance and Ethex specialise in green lending by funding clean energy solutions and environmentally-friendly projects.
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Even among the non-green lenders, ESG has been a top consideration for P2P platforms. Property lenders such as Kuflink have committed to meeting certain energy goals, even setting their own net zero goals.
However, as an alternative investment option, P2P platforms are unlikely to be the first port of call for ESG investors.
The market in ESG funds and indices has never been bigger. There are hundreds of managed funds and exchange-traded funds (ETFs) which have ‘ESG’ in the title, and ESG ratings agencies such as MSCI and Sustainalytics offer regularly updated data on the ESG risk associated with listed companies across the world. It has arguably never been easier for an investor to create an ESG-friendly portfolio using digital resources which are primarily focused on the mainstream bonds and equity markets.
However, recent data from the UK Sustainable Investment and Finance Association (UKSIF) has found that investors are becoming disillusioned with ESG ratings, with 59 per cent of global asset owners saying that the lack of standardisation in ESG data, scores, and ratings is the largest roadblock to increased adoption of sustainable investment.
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At the same time, ESG investing has been falling out of favour as the cost-of-living crisis and rising interest rates force investors to think with their wallets, rather than potentially paying extra to maintain an ‘ethical’ portfolio.
Of course, the most committed ESG investors will still prioritise these metrics when adding a new investment to their portfolio. P2P lenders have always shown a willingness to do their own due diligence before choosing a new platform or a new loan, rather than simply relying on third party reviews or advisor recommendations.
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The truth is, when it comes to ESG investing, the ratings agencies only tell part of the story. With any investment, it is important to understand exactly where your money is going and who is managing it on your behalf. If the ESG metric lines up with your own personal financial principals, there is plenty of external research available to help you make a decision. But ultimately, there is no match for simply going to the investment company’s website and spending ten minutes learning about their real-life commitment to ESG. If every investor did this, P2P lending may occupy a much larger space in the average investor portfolio.