Millennials are driving environment, social and governance investing
Prioritisation of ESG factors as the basis for investment may well be the catalyst for indefinite change in business and market investment
Millennials — those now aged between 24 and 39 — are typically entering or are in the midst of their prime earning years. More important, millennials are set to become the beneficiaries of what’s become known as “the Great Wealth Transfer” — in other words, the generation that, overall, will inherit handsomely from Baby Boomer family benefactors and ultimately those from Generation X in the coming years.
According to a report by MSCI, millennials account for 23% of the global population. Analysts predict that upwards of $30-trillion is already being transferred by Baby Boomers to younger generations and this will continue for decades to come. Unlike millennials, prior generations’ approaches to savings and investment prioritised returns over governance and sustainability factors, with a focus on savings and ultimately retirement. However, data and emerging trends show that millennials’ prioritisation of environment, social and governance (ESG) factors as the basis for investment may well be the catalyst for indefinite change in business and market investment.
Baby Boomers emerged as the descendants of the Silent Generation, which endured and survived World War 2, a period when money was especially hard-earned and financial safety nets were practically non-existent.
The ethics of hard work, grit and commitment were transferred to Baby Boomers, who went on to realise higher standards of living and increased wealth. However, Baby Boomers would have had little in the way of monetary support from their parents and were more financially constrained than the millennials of today, who have wealth inheritance to look forward to. Realistically, the Baby Boomer generation had far less leeway and awareness to explore ESG.
Even though ESG sentiment and awareness began creeping in during the Baby Boomer era, as public opinion shifted against certain industries, such as tobacco production or association with political regimes, such as apartheid in SA, the ESG field was very small by comparison to today. Millennials now have the luxury of analysing and questioning a variety of investment factors and information that were not readily available to Baby Boomers.
Two thirds of global consumers were willing to pay more for brands with ESG credentials, while 73% of millennials would spend more for sustainable products and services
Evidence increasingly shows us that millennials’ investment choices typically align with their values, many of which are indicative of an ethos that favours sustainability, good governance and environmental awareness. Compared to earlier generations, this is a radical shift in approach and a sign that millennials like to take moral ownership of whom they invest with and how, with returns no longer being the singular attraction for investment. It’s arguably a more privileged and powerful investment stance that fund and asset managers need to adapt to when building portfolios now and in the future.
According to the MSCI “Swipe to Invest: The Story Behind Millennials and ESG Investing” report, sustainable investment interest among investors in general increased from 71% in 2015 to 85% in 2019. In the case of millennials, interest rose from 84% to 95% over the same period.
The report states millennials and high net-worth millennials are already driving rapid global growth in ESG investment, with 83% actively reviewing the ESG impact of their investment holdings, while 57% have deliberately halted or declined to invest in a company based on the impact its products or services have on the health and well-being of people and the environment.
Investment firms, ranging from personal finance to private equity specialists, need to re-evaluate their strategies to be more closely in line with millennial investment priorities. This will require firms to provide greater transparency and detail when it comes to diversified portfolios and may require asset managers to be more discerning and expand diversification across a broader range of markets.
But despite millennials’ strong ESG preferences, they also demand returns worthy of their investments. A recent study published by Morgan Stanley demonstrates a positive correlation between sustainable strategies and high performance. In an assessment of more than 10,000 funds, researchers noted that “investing in sustainability has usually met and often exceeded the performance of comparable traditional investments” — findings, they say, were consistent across asset classes and over time.
From an operational and retail perspective, sustainable investee companies also have the potential to command premium prices for products, services and shares, depending on the economies and markets they operate in. The 2015 Nielsen “Global Corporate Sustainability” report identified that two thirds of global consumers were willing to pay more for brands with ESG credentials, while 73% of millennials would spend more for sustainable products and services.
This data is, of course, relates to developed economies and countries, as firms, consumers and investors in emerging markets continue to have financial barriers and limitations that their counterparts in wealthier nations seldom experience. Nevertheless, the Great Wealth Transfer is unfolding in emerging economies, mainly among wealthier families and individuals in countries such as China, India, Brazil and SA.
But it remains to be seen whether domestic and overseas direct investment will continue to be forthcoming in the short to medium term, given the uncertainty surrounding the global pandemic and whether tough economic conditions will slow or even deplete the value of wealth transfers in the coming years.
That notwithstanding, any temporary slowdown is unlikely to affect millennial sentiments towards investing. In fact, given the global market fluctuations during the pandemic and the well-publicised economic downturns in many countries, millennial interests may influence an acceleration of ESG investment in the short term.
• Mabuto is ESG officer and partner at Spear Capital.
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