Millennials Will Force an ESG Revolution

It falls to the youth to build a better world – and now, they finally have both the money and motivation to do so.

Today’s millennials are at a pivotal point. They stand at the threshold of their peak saving years and maintain a strong belief that the companies in which they invest should go beyond money-making to become part of the solution. In a recent global survey conducted by the deVere Group, a remarkable 77 percent of millennial investors said that environmental, social and governance (ESG) issues are their top priority when assessing investment opportunities.

Millennials’ growing investment influence is difficult to deny; as of 2019, those between the ages of 23 and 38 accounted for over a third of the global population. They are also in the process of undergoing a massive, multi-trillion-dollar wealth transfer as baby boomers pass on their resources to upcoming generations. These funds, in addition to millennials’ own burgeoning savings potential, have given younger investors considerable power in the investment sector – and their focus has rested firmly on sustainable investing.

Driven in part by millennial activism, sustainable investing has become a significant trend in recent years. The term refers to any investment process that incorporates ESG factors into investment decisions, but is made up of two distinct activities. First, following the United Nations-backed Principles for Responsible Investment, it refers to the integration of ESG considerations into the analysis and valuation of investments, along with engagement with investee companies on those same issues to improve their ESG performance. Analysts who ignore material ESG factors risk underperformance as they will be missing important risk and return inputs to their financial models. Second, it refers to the screening of companies based on moral, ethical or social responsibility concerns: an alignment of an investor’s values with the portfolio holdings. 

When sustainability-minded investors put money toward a chosen company or organization, they do so in the hopes that their investment will not only provide a financial return but also drive measurable social and environmental change. Particular areas of focus may include climate change, renewable energy, healthcare, working conditions and community development.

The market for values-driven sustainable investing is, in a word, enormous. According to reporting from Morningstar, flows into U.S.-accessible, open-ended and exchange-traded funds identified explicitly as “sustainable” topped $13.5 billion in 2019. This achievement was a remarkable leap from even a year before, when, as the Morningstar reporter notes, “flows had never topped $2 billion in any quarter, and the calendar-year record, set in 2018, was just $5.5 billion.” Sustainable investment is on a meteoric rise – and the generational force that propels it is apparent.

Millennials think about investments differently than their predecessors. The most significant shift is their tendency to be hands-on; millennials tend to take more of an active role in determining their investments than baby boomers or Gen X investors.

As Greg Cobb, the Director of Fixed Income for Boyd Watterson Asset Management recently shared for an EY report on millennials’ presence in the sustainable investing sector, “The industry is moving from a passive investor population, which is dependent on the income from defined benefit and pension plans to a population that is self-funding via their defined contribution plans. These millennials will demand more active involvement in their own investments as they wish to be more actively involved in controlling their own destiny. Along with this more active approach will come more activist tendencies.”

Millennials want to invest in companies that resonate with their values – but that doesn’t mean that they don’t care about portfolio diversification and long-term performance. Instead, they want their investment managers to ask tough questions of potential investees and actively work to improve behaviour and performance. In 2018, the Allianz ESG Investor Sentiment Study Report noted that 89 percent of surveyed millennial investors expected their financial advisors to thoroughly assess a company’s ESG factors and track record before recommending it as a potential investment. Moreover, 57 percent of millennial investors have divested from or turned down an investment opportunity because the company harmed consumers’ health and well-being.

These findings demonstrate that in the future, investment firms and companies will need to adjust their strategies to take the priorities of socially minded millennial investors into account. Millennials have only just begun to command attention in the investment space; as they continue to move towards the peak of their savings potential, their influence will continue to grow. It seems reasonable to assume that interest in socially responsible investing is neither a fad nor a short-term trend; rather, attention to ESG issues will likely increase as younger investors grow more secure in their finances.

It is worth noting that millennial investment preferences aren’t the only reason to make socially responsible changes. In one recent study, researchers at Morgan Stanley assessed the performance of over 10,000 funds and managed accounts and found a positive correlation between sustainable strategies and high performance. The writers noted that “investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments.” These findings were consistent across asset classes and over time.

Moreover, companies that demonstrate good corporate social responsibility are more likely to command premium prices for their products, services and share prices. In 2015, the Nielsen Global Corporate Sustainability Report found that two-thirds of global consumers are willing to pay more for sustainable brands – and 73 percent of millennials worldwide will pay a higher price for sustainable products or services.

The metrics for both investment performance and the pricing of companies’ products are compelling and should prompt all companies and investment firms to consider actions they can take now.

There is no quick fix that companies can apply to appeal to millennial investors and their focus on ESG issues. Rather, organizations will need to employ a multifaceted approach to demonstrate their support for environmental and social causes – and dedicate considerable time, effort and resources to the process. These efforts must be transparent and authentic, as both investors, analysts and employees can see through PR stunts and greenwashing.

The steps that organizations choose to take will vary. Investment companies might opt to hire sustainability professionals who can lead sustainability initiatives with genuine buy-in from internal and external stakeholders. Investment management firms might look for analysts and portfolio managers who have in-depth understanding of ESG issues in addition to skills in more traditional financial analysis. They may also choose to train advisors on how to evaluate and communicate with millennial investors the investment options that can both provide above-par financial performance and meet emerging expectations for sustainability.

Regardless of strategy, however, one point is clear: millennials are changing the investment landscape. Sustainable investing is no longer a niche; it has become a central platform for investment. Whether based on the valuation of stocks using ESG integration, or on the values-based preferences for investments or products – or both – the sustainability of companies is a central focus of a new generation of investors. Companies and investment firms alike will need to get on board – or else be left chasing the millennial rush.

The information contained herein is for general information purposes only and is not intended to provide financial, legal, accounting or tax advice to be relied on without an individual first consulting with their financial advisor to ensure the information is appropriate for their individual circumstances. The opinions expressed in this article are of its author only and do not reflect the opinion of Odlum Brown Limited. Member-Canadian Investor Protection Fund.

Image credit: Mikaala Shackelford/Unsplash