Also, this week:

• 📱 Apple banking

• 🧐 The Power of Product Thinking

👩‍⚖️ ESG - broken?

The Economist claims that the environmental, social, and governance (ESG) approach to investment is broken. The term ESG dates as far back as 2004. The idea is that investors should evaluate firms based not just on their commercial performance but also their environmental and social record and their governance by using numerical scores.

The reason they claim it is broken? Look at this graph showing scores from ESG-rating agencies on well-known companies:

Or this graph showing divergence in ESG ratings on large, global companies:

The Economist claims that ESG suffers from three fundamental problems:

1. It lumps together many objectives and has no coherent guide for investors and firms to make the inevitable trade-offs. Is it, for example, possible to build vast numbers of wind farms quickly without damaging local ecology?

2. It is not being straight about incentives. The idea is that good behavior is more lucrative for firms and investors. But it can often be very profitable for a business to externalize costs, such as pollution, onto society rather than bear them directly.

3. It has a measurement problem. The correlation of ESG rating agencies is generally relatively weak – 0.4 (compared to the correlation of credit ratings at the 0.9 mark). Firms can also improve their ESG score by selling assets to a different owner who keeps running them like before.

This correlates to our understanding of the area as well: A few years ago, we worked on a Proof of Concept on an ESG savings solution, but in the end, had to scrap the solution because we realized that the data behind it wasn't good enough. It would be nice to invest in a diversified fund with companies that work for more equality, have women in top management, or that work for better conditions for girls in developing countries. Or to see the result of what your investment actually meant: How did the world become better for you saving in an ESG index fund instead of a regular index fund? Did CO2 emissions go down because of your investment choices? Until we can see some measurable change, it might be a hard sell for most of us.

The Economist suggests reforming the ESG concept and focusing only on what they believe is essential, namely climate emissions. Arild Skedsmo, a subject expert on climate and nature in KLP, does not think this is a good solution:

Jan Erik Saugestad in Storebrand also means it is insufficient to focus only on direct emissions. That might be, but something needs to be done when a coin flip correlates better than ESG ratings between companies. 

📱 Apple Banking

We've previously written about Apple introducing Apple Pay Later and slowly stepping into the banking space. Unit has gone further and sketched out how it might look if Apple built banking. It is worth a look if you find the topic interesting, though it is very US-skewed with support for checks and direct deposit. The most exciting part is the sketches on financing and how Apple could offer them personal loans, mortgages, and cash advances that are intelligently underwritten and tailored to their needs.

AltFi has also gone down this rabbit hole and written about the fintech startups Apple might want to buy next. On their top list is, among others, Monzo, Starling, Revolut, Klarna, and Grover.

Speaking of Monzo: Tom Blomfield, the co-founder of Monzo, has written about how they got 1 million customers to sign up for Monzo in the early years without spending significant money on marketing.

🧐 The Power of Product Thinking

Julie Zhuo, the co-founder of Sundial and former VP of Product Design for the Facebook app, has written about product thinking and how you can learn to build better products. A highly recommended read if you are creating products:

The Power of Product Thinking

That's it for this week 👋

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Marius Hauken, partner Stacc X