Robinhood Company ESG Analysis
Introduction
As a crucial leader in the online brokerage industry, Robinhood is currently receiving more voices on its commitment to social responsibility. While putting its stakeholders’ benefits first, Robinhood has recognized the benefits of adopting ESG strategies to its operations. However, with a close evaluation of ESG factors and its effort, Robinhood should consider 1) evaluating the current recruitment process to incorporate more diversity and inclusion, 2) increasing efforts in environmental factors reporting and carbon emissions from the workplace, and 3) revealing more quantitative and qualitative reviews on governance issues.
Company Overview
Obtaining the belief that “everyone should be welcome to participate in [our] financial system,”, Robinhood was founded in 2013 to create a platform providing financial services for everyone. It provides a mobile system that allows customers, regardless of their backgrounds, to in socks and exchange-traded funds with a commission-free model in an attempt to realize equitable financial access. In addition, it offers cryptocurrency services that not only enable its customers to trade and exchange but also provide real-time market data for making purchasing and selling decisions. Robinhood’s Board is composited of 9 total directors, led by the founders Vladimir Tenev, now serving as the Chief Executive Officer, and Baiju Bhatt, the current Chief Creative Officer, and established four committees that oversee different key business risks.
Profit Resources and Customer Segments
Robinhood breaks its income stream into three categories: transaction-based revenues (72.8%), net interest revenues (17.5%), and other revenues (9.8%). Accounted for the largest mainstream, transaction-based revenue is generated by the adoption of payment for order flow (PFOF), which is a compensation method when brokerage firms are paid to routing trades for execution to a wholesaler, like Citadel Securities or KCG. As a result, Robinhood is able to provide zero-commission services by attracting a large group of customers with a large number of orders and sustaining itself with fractions of a penny per share. Due to its commitment to “democratize finance for all”, Robinhood holds a diverse profile of customers with a variety of social and economic statuses across the U.S. No matter if they are newcomers or experts alike to financial services and the financial market, users can always find their way with the support by Robinhood services to invest. Also because its nature is a mobile platform, its largest customer segment lies in the group of Millenials (18 to 29 years old) who are interested in trading and performing transactions at a high frequency with a smaller investment amount.
Competitors
According to CBInsights, Robinhood is now in the second round of private investment in public equity after it initial public offering on July 28, 2021, and has received a total funding of $5,572 million which is far more than others of its competitors. Its major domestic competitors include SoFi, Stash, M, Public, and E-Trade and it holds a 14.5% market share following 21.1% by E-Trade Financial. While E-Trade was categorized as the all-star leader in the online brokerage industry, Robinhood is expected to be the disruptor by holding an approximately 213.4% growth in annual revenue in 2021. Despite the fact that it faced scrutiny from the public in 2021 due to the GameStop fiasco, Robinhood is competitive in its reputation and branding as the first commission-free trader, diversified product portfolio, high-rated customer services, and acceptability of investors who have little knowledge so that these competitive advantages have helped it attract and sustain its customers. The rapid revenue growth and second the palace of market share have made it unneglectable in the industry.
Financials
With a current ratio of 1.23 in 2020 and 1.56 in 2021 calculated using the data from its balance sheet, Robinhood is slightly struggling with its liquidity which is crucial to be an online broker to manage and develop its business operations. Customers would need quicker and more efficient operational support no matter on the mobile app itself, or customers' services during the transaction. In addition, its debt ratio of 0.81 in 2020 and 0.63 in 2021 indicates a challenge in Robinhood’s solvency. Yet, both ratios have shown an improvement in the historical data so Robinhood is still in a shining spot in the industry.
Company Sustainability Approach
Partnered with SustainBiz, Robinhood published its ESG report in 2021 and has set ESG priorities aligned with its two core values: Safety First and Participation is Power. Safety First refers to its commitment to protecting customers’ security and privacy by “working closely with regulators and lawmakers”, while Participation is Power indicates its effort to close the financial gap by providing an accessible trading system for everyone. Holding an ambition to help identify the most critical ESG topics that its stakeholders care about, it has conducted more than 40 qualitative interviews with its executives and senior leaders and has collected more than 29,000 surveys from its customers to gain insights and design future sustainability strategies.
Environmental Factors
To measure its success in incorporating environmental factors into its business, Robinhood has reported its greenhouse gas inventory data, efficiency, and emission reduction strategies during office operation, and future carbon removal and renewable energy investment model. It categorized that such efforts contribute to building up a workplace environment that matches the principle of putting safety first for both customers and employees. The Greenhouse Gas Inventory report revealed a significant amount of emissions related to its operational services, especially in resource consumption. The phenomenon was rationalized by the fact that changing to a work-from-home environment requires the company's extra inventories of goods, like laptops and other office equipment to support its employees. However, the emission amount for business travel and employee commuting is still leading. For efficiency and emission reduction strategies during office operation and future carbon removal and renewable energy investment, there was no data published although projects that are invested by Robinhood have reported their carbon footprint. Yet, the information related to Robinhood’s share of investments and environmental returns is not available.
Social Factors
To measure its success in incorporating social factors into its business, Robinhood has reported the demographic data of both its customers and employees to reveal its contribution to diversity and equality. More than ⅓ of its customers are identified as women and its customer base shows a lead in the composition of black investors and Hispanic investors to other incumbent firms. In addition, more than 50% of its customers are first-time investors attracted by Robinhood's numerous educational resources. Robinhood Learn, In-App Education, Newsfeeds, and Robinhood Snacks are vital to open the door to all new investors as Robinhood promised. Regarding the workplace, gender role distribution and race/ethnicity distribution are reported. Although men still seemed to dominate the workplace, the ratio is relatively close, especially since more women actually are in general and administrative roles. In regard to race and ethnicity, white plays a dominant role, followed by Asian in most of the sectors. Both Hispanics and Black still hold a small portion of the positions.
Governance Factors
To measure its success in incorporating social factors into its business, Robinhood reported its Board Composition, categorized by gender identity and race/ethnicity. The Board’s gender ratio is 6 to 3 - male to female - and 6 to 3 - white to Asian/Black/Hispanic. In addition to its Board structure, Robinhood showed its effort in transparency by establishing four committees to oversight the management. The Board of Directors can thus regularly and immediately be informed about strategies and management that are associated with risks by the management team so that make changes and improvements in a faster manner. Moreover, Robinhood published its written policies and internal control documents that are accessible to the general public to generate greater transparency as well as its dedication to whistleblower protection. However, no data is available for the actual realization.
Recommendations and Conclusions
Being an online financial institution, Robinhood has shown its ESG efforts by incorporating different ESG factors into its services and operations. Yet, there is more to work on. Obtaining its mission of democratizing finance for everyone, Robin’s customers’ profile indeed shows success in diversifying and including. Such effort seemed not consistent with its internal operations when the demographic distributions of the Board and employees are heavily skewed. Even the gender distribution of the Board is fine, race and ethnicity wise are lean when the majority is white, not mentioned to the leading distributor of white employees. The customer size is not the only standard for evaluating Robinhood’s social responsibility. Therefore, in order to make its mission more outstanding, the ESG team should reach out to the Human Resources team to examine the current recruitment process and if there are any procedures that prevent diversity and inclusion and then make adjustments to the programs.
In regard to environmental and governance standings, the current report lack quantified data to draw a conclusion. However, with a peek at its future environmental-related strategies, Robinhood is likely on the right track in attempting to reduce carbon emissions at the workplace by adopting more renewable energy usage office supplies. For the next step, the ESG should take scrutiny on comparing historical data and future data after the adaptation to measure its success. Moreover, the effort generated from the sustainability investment projects should also be provided with more information related to the overall sustainability that is related to Robinhood’s share, instead of accounting for the overall project efforts in sustainability.
Similarly to environmental standings, the ESG team should contribute more effort to governance standing. Stating that Robinhood obtains certain employee fair treatment strategies may not be appealing to raise its governance standing because having the policies and realizing the policies are completely different. Therefore, the ESG team should consider incorporating questions in the surveys to its employees on their opinions and feelings about corporate governance. By addressing these problems existed, Robinhood will be able to create a greater impact both in the financial market and in the ESG standing.
