The Green Finance Podcast Ep. 2: The S in ESG and the role of inclusive product design
- A lot of the focus today goes on the E in ESG investing, which represents the environmental factor, and the latter two parts – Social and Governance – are often overlooked.
- In the second episode of the Green Finance Podcast, we explore what the S in ESG stands for with Timothy Flacke, the co-founder and executive director of Commonwealth.
Hello everyone, welcome to the second episode of the Green Finance Podcast.
Today I’d like to explore what the S in ESG stands for. My guest is Timothy Flacke, who is the co-founder and executive director of Commonwealth, a national nonprofit helping the financially vulnerable build security.
A lot of the focus today goes on the E in ESG investing, which represents the environmental factor, and the latter two parts – Social and Governance – are often overlooked.
I’ve invited Tim to help me understand the social factors behind sustainable investing, and how we can increase equity and inclusion in fintech by using clever product design.
Green finance is not just about investing in clean energy or carbon sequestration. The core of the problem is sustainability – how to create financial systems that enable people to thrive over the long term.
How can a company manage its relationships with its workforce and the society in which it operates? What types of social factors can affect a company’s financial performance?
We see research that points out that so many of us are living paycheck to paycheck in the financial present, and enormous amounts of stress are associated with that. The Federal Reserve shows that 36% of us don’t have $400 to handle an emergency. We had a chance to disaggregate that, and look at that data by race, gender and income – perhaps not surprisingly, that 36% pops up to 58% if we look at the households under $60,000 in annual income, which is just slightly below the median in the US, and it pops up to 70% for Hispanic households under $60,000. And just a crazy 72%, for black households under $60,000. Unsurprisingly, there’s also an element of race and gender that comes into this.
If we think about social factors and what a responsible company might want to be looking for, our observation is that social aspects have an effect on the business performance. There’s lots of evidence which we can talk about, but it’s also just common sense that a big fraction of your workforce is spending considerable amounts of stress and energy thinking about whether the bank balance is going to be high enough when the bill comes due.
There is other data that shows that it’s on the order of magnitude of a dozen or more hours a month that workers are spending on the job trying to manage financial issues. So our insight from that is that employers are actually in a really powerful position to help their workers have that short-term financial security. And when that occurs, then all of the things you might imagine can come with it – people are more likely to be present on the job, they’re less likely to be absent from work, they’re more likely to provide higher quality customer service and be more productive employees.
How can product design ultimately improve financial security?
What we really have to focus on is not just the input side of what we do as individuals or employers, but the output and the outcome side – thinking more about financial security and spending less time and energy on managing the short term. That really lies at the heart of this concept of inclusive design, as well as being clear that it’s not just about the features and products that financial service providers offer, but whether they are engineered and designed to achieve these kinds of outcomes. Especially for the people who, in our view, both have the greatest need for financial stability, and where the greatest benefits for society and for individual households are likely to occur.
That focus on the outcomes led us several years ago to start a new body of research – we realized that people can still not have a feeling of financial security and not have the sense of stability that unlocks that higher performance in the workplace. We had to not just look at the hard numbers; we had to push ourselves to say, what puts those pieces together, and allows people to have the kind of outcome that we want. We spent a lot of time with low and moderate income households and individuals who exhibited and reported those feelings of financial stability.
We identified some of the characteristics that seemed to accompany that outcome that we were aiming for, and the first one we noticed was that these people tended to view their financial lives as a journey. This seems like an important insight from a designer’s perspective, to avoid the very natural trap of really speaking to people about the situation that they’re in at the moment. That really led to the second insight, which is that people who feel financially secure, have and are comfortable with having aspirations and goals that are often rooted in deep values.
The third thing that we saw is that people who report feeling financially secure have access to and celebrate a network of people like them who are on this financial journey. These three core insights have really formed the basis of a new approach to inclusive design that we’re trying to put out into the world and support product designers to embrace in their work.
What is the impact of focusing on changing the features and distribution channels rather than developing products that tell people to just act differently?
As designers, we all hear the phrase of meeting people’s needs, and in this quest we fall into the trap of really seeing that person as being the only source of direction in their lives. One thing that just comes up over and over again, at least in my view, is that so many of us are saying, ‘I know I’m part of this, but I’m not enough. I can’t do this on my own.’ I personally saw signs of that in our conversations about race – I can try to do the right thing but that’s not enough; that’s not going to solve centuries of institutional racism. And the same thing applies to personal finance – people say they know they have a part in this, they want to be in charge of their finances, but they can do everything right and it’s still not going to result in the desired outcome.
There’s a bigger picture about changing the landscape, the distribution channels, and the orientation of a powerful system that allows an individual product designer inside an individual firm to have a much bigger reach than just what they’re able to do with their own product if they’re thinking about what role they play and reorienting that larger system, in terms of what problem it’s focused on, and how it presents that problem.
There’s an argument that adequate wages are not sufficient to achieve financial security – what are your thoughts about that?
Most of us need tools to convert our income into those outcomes I spoke about earlier, into the feeling of security and the reality of security. And in the US, the way our system and our economy has evolved, especially for lower income workers, the workplace is often one of if not the best resource to get those tools. So we have to both look at the adequacy of the income, and what are the levers and tools that people have to turn that income into managing their financial lives.
We think about something even as straightforward as how an employer pays their workers. It has a really dramatic impact. If you are a worker who doesn’t use the mainstream banking system, which there are a lot of in the United States, and your employer offers a quality pay card product that has features like savings, and good financial terms, you have really helped that worker take enormous strides towards turning their income into the day to day financial life that they need. I think you’re absolutely right on the necessity of a fair and adequate wage, and I think we’ve seen some real movement in this country in the last several years around that. But I don’t think we should allow ourselves to not focus on the rest of the picture. I think many of us have come across people in our lives who actually have quite a bit of income, and yet still just don’t have their financial lives in a very good place. So we need to keep our eye on the full, full picture.