Inside Interactive Brokers’ embrace of ESG-friendly investing

On today’s podcast, I’m joined by Will Peterffy and Eddy Soffer of Interactive Brokers.

Will, son of Interactive Brokers’ founder, Thomas Peterffy, is a new board member of the online brokerage and its ESG Ambassador. Interactive Brokers recently rolled out a portfolio scorecard that grades equity portfolios along several dimensions, like reducing emissions and human rights.

The pair join us on the podcast to discuss the new initiative and what customers are asking for when it comes to investing responsibly. We also talk about where this environmental, social, and governance initiative is headed from a product perspective and across the industry.

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The following excerpts were edited for clarity.

Moving into ESG

Will Peterffy: I think it’s a pretty good story. My father founded the company way back when. And growing up as his son, I have always been very environmentally motivated. I’m 31 years old. So I kind of was seeing the real time destruction of our planet. And through growing up with him as a father, I was always immersed in finance, and mainly mainstream public finance. Through that, I ended up working at some hedge funds in Manhattan — that was a chapter of my life. And I actually left there extremely disheartened. I saw decisions being made that impacted the globe and whole communities that only were focusing on financial profit, and none of the other impacts.

I’ve always been somewhat of a big picture thinker. When I look at the world as a whole, I see that these certain externalities, that I was taught about in economics, are really unacceptable. Those are the things in the world that are getting treated very poorly, and that we’re seeing go away very quickly, like common community resources of the air, the earth, the planet. It takes more work to be a good citizen to take care of your community and to take care of the planet. And currently, financial incentives are the main motivator behind a lot of human activity. Bad activity needs to be accounted for and good activity rewarded in the marketplace.

When I was trying to decide if I wanted to join Interactive Brokers, I really wanted to make sure that I was joining for the right reasons. And this was about the time ESG had been around for a few years. But I kind of saw it as a baby step, like it wasn’t really going to be what we needed. But I saw that the data points that it was utilizing, and how much data is growing, give the idea to be able to automate this process of investing, aligned with values. I had gone through this process when we were setting up our foundation — we had to invest all of that money, and we really didn’t want to be investing in companies that would be contributing to the very problems we were trying to solve through the grants of the foundation. And so that was a lengthy process.

And then I saw all of this data and realized, you know, we could automate this for people and I saw a real hunger for people to want to be empowered in their finances and to make impact with their dollars. And so that was the idea and we wanted to bring it to the people.

Addressing culture with ESG

Will Peterffy: My initial joining was really just on the board and it was kind of comical. ESG came up in that fateful board meeting — I really had those two statistics, something along the lines of $60 trillion in wealth transferring to millennial and younger generations over the coming years. And the younger generations are at least four times more likely to pay more for a eco friendly product rather than for a mass produced product. That kind of got everybody really jazzed on ESG.

Eddy Soffer: One of the things we wanted to do is make sure that the elements were incorporated into the overall culture. So on the S side of ESG, we’re focusing a lot on increasing diversity and inclusion within the firm. We have specific programs that will help to increase the number of females at all levels. We’re also looking to engage more on a global basis, to create more connections between employees. We recently launched an employee magazine that now everybody’s able to look at and to get to know their colleagues. Because we are a large company, we have presence in quite a number of markets.

We also recently approved a matching gift policy. We’re looking to introduce Community Relations and volunteer policies as well. Earlier this year, we donated $5 million in the United States for COVID-related causes, both for research and to help those that need it the most. So we expect to continue those sort of things in the future.

ESG product launch

Will Peterffy: This idea formed out of thinking how we automate the process of our clients being able to align their capital with their values, or as I like to say, align their capital with their hearts. We saw the plethora of ESG data that is available these days and only growing. I saw that we could automate this for all of our clients. And I saw a real hunger for that in the world.

This ESG tool exists on all of our platforms: currently, our trader workstation, our client portal and our mobile app. And so when you log on to the tool for the first time, you’ll be prompted with a values-oriented survey. We came up with 13 customized values, criteria that we think speak to the comprehensive set of values that one would want to pay attention to when impacting business on the planet. Things from pure water to sustainable product life cycle, to transparency within the company, to LGBTQ inclusion.

You go through and answer those on a sliding scale of how much they’re important to you. This is the most important thing to me: I don’t want to be involved with any company that impacts one of these values in a negative way. Actually the opposite — I only want to be involved in companies that are impacting us in a positive way. Eventually, you’ll instantly be able to see your portfolio through this values lens we’ve created. It is pretty much a letter grade in the center of what we call the impact lens, with a ring around that circle that’s segmented proportionally based on your positions in your portfolio.

It’ll also show you other companies that you’re going to be able to instantly swap for that are in a similar market cap in a similar industry, but are much more aligned with your values, so you can improve your overall values score, while instantly aligning your capital with your core values.

Customer reaction

Eddy Soffer: I think customer reaction has been overall very good. I think there’s an appetite for it in the marketplace. We are seeing positive responses. People are interested in looking more into it and seeing more things that we can add into it, which I think is a very good sign. We’re also seeing quite a number of inquiries and responses coming for the European markets. ESG is quite prevalent in Europe, much more so than in the US.

Looking into the future for ESG

Will Peterffy: I see in the coming years that every single company will have to have a decent ESG score. A really positive thing that I’m seeing in the collective right now is that young folks, particularly, are a lot more aware of and prioritizing responsible behavior. We are in this unprecedented time in the world. This is an important area to help us get to a future where wealth is created at the same time as wellness for the planet and its people — that all of these things can collectively work together.

Eddy Soffer: This is a force that’s coming from the Millennial and Gen Z generation, and it’s pushing upstream. You’re already seeing it in quite a number of financial firms where they’re starting to offer ESG. So it’s something that asset managers, broker dealers, and even banks are starting to take a look at — outside of just solutions, lending products and underwriting standards are starting to look at ESG parameters. Another factor that’s also going to usher in more ESG is the regulatory environment, which is much more prevalent in Europe, but also coming to the US. I think those two forces are going push companies to present this solution as a must in the future.