The COVID crisis has helped support a drive towards a more sustainable planet so responsible companies are beginning to see the value in integrating the ESG theme into their investment process. The greatest demand for ESG products will come from private banks and asset managers, followed by independent wealth managers as they integrate ESG and SRI into their pension funds and insurance products.
Even before COVID, between 2016 and 2018, ESG and SRI emerged as one of the major global themes as a go-to investment vehicle. Every $1 in $4 invested in the American markets was going into ESG and SRI and this activity has accelerated significantly since the global pandemic occurred1. We are seeing over $340 billion invested into ESG and SRI over the past two years – this actually outstrips the rest of the stock fund universe combined2.
PEOPLE’S OPIONION ON ESG
To understand why this is happening, let us look at some of the trends underpinning this activity. Presently, there is a huge amount of assets and wealth being transferred from the baby boomer generation down to Millennials – some $30 trillion will be passed down over the next few decades. Millennials are also set to represent around 75% of the workforce by 20253, a huge cohort that has grown up to be more environmentally aware in terms of “going green”, reducing carbon emissions, recycling and reusing and being sustainable in their everyday lives.
A recent survey concluded that around 95% of Millennials are expressing an interest in sustainable investment4. Since 2017, about nine in 10 are expecting their financial advisors and professionals to be exploring a company’s position with regard to ESG, and for the higher net worth Millennials, about 88% are reviewing the ESG impact of their investment holdings5. We also saw around 57% of these investors stopping or declining to invest in vehicles that adversely affected their health and wellbeing.
Looking at other generations, an interesting survey in the Wall Street Journal6 recently compared the attitudes towards ESG and SRI of high Net Worth investors across generations, what resulted was a particular dominance of the Millennials cohort – in particular from 2016 onwards, over 70% said that they have been reviewing their investment portfolios to include ESG factors. This compares to 30% of Baby Boomers (currently entering retirement or in retirement) and 60% of Generation X.
Millennials also tend to be more familiar with concepts like responsible investing, ESG, SRI, Faith Based Investing, with large majorities of millennials talking about investments in the financial world in a very different way from Baby Boomers. If you take ESG as an example, 80% of millennials are fluent and familiar with the term compared to about 6% of baby boomers7
Looking at the generational patterns, it’s safe to assume that large majorities of Millennials are set to inherit a lot of the assets over the next two to three decades and they are thinking very differently about ESG issues than earlier generations. Millennials, are about two times more likely now than the average investor to make sustainable investments, with 86% saying they’re interested or very interested in sustainable investing. Around 61% say they’ve made at least one sustainable investment action in the last year and over 75% think that their investments can influence ESG factors such as the huge issue of climate change6
As millennials begin to turn 40 in 2021, the oldest members of this generation have grown into adulthood amid the backdrop of the Great Recession and the COVID pandemic, student loans, stagnant wages and rising costs of living.
Millennials have a reputation for being values-driven in their approach to their money and their careers and this includes their investing habits: Millennials spurred the growth of sustainable investing throughout the 2010s — investors contributed $51.1 billion to sustainable funds in 2020, compared with less than $5 billion five years ago8
Sustainable investing, or the use of environmental, social and governance (ESG) factors in determining which companies and industries you want in your portfolio — and which you don’t — can apply to many social and political issues. Climate change, in particular, is a big reason for its growth.
According to the Harris Poll (taken on behalf of CNBC), about one-third of millennials often or exclusively use investments that take ESG factors into account, compared with 19% of Gen Z, 16% of Gen X and 2% of baby boomers9
The difference in adoption is not because other generations aren’t interested in sustainability or investing but rather the availability and access to such investments.
While the first sustainable mutual fund launched in the 1970s10, according to Morningstar, millennials hit their prime investing years at the same time that ESG investment options became more plentiful than ever. In 2019, almost 500 actively managed U.S. funds added ESG criteria to their prospectuses. Older generations didn’t benefit from that wealth of options and easy access when they were starting out11.
The growing awareness of the harm caused by climate change and increased attention paid to politics over the past few years have led to wider acceptance of ESG investing, irrespective of age. Given the very real consequences of climate change on businesses and their bottom lines, for example, taking ESG factors into account is just smart long-term investing for pension and retirement planning as well as wealth accumulation.