“The millennial generation’s investment preferences reflect wider trends that have been reshaping investment processes and products for some time. Faced with the realities of climate change and globalisation, growing interest in investing based on environmental, social and governance (ESG) considerations – what Walter Scott likes to put under the rubric of ‘sustainability’ – has been generally increasing, says Paul Loudon, investment manager at Walter Scott. “Millennials are playing a part in terms of rising interest in ESG investment but it is an area of investment that is of growing interest for all age groups. It is a gradual long-term secular trend.”
Lindsay Scott, investment manager at Walter Scott, says: “There has been increased interest in the environmental aspects of investing, not just among millennials but among all investors, especially since the Paris climate agreement of 2015. That is filtering through in terms of how investors and investment managers analyse companies.”
However, the strong commitment to sustainability issues expressed by many millennials, and their increased spending power as they age, is likely to push ESG investing even more into the spotlight.
Demonstrating real change
Many millennials expect their investments to have a positive real-world impact: 75% of millennials believe their investments can influence climate change and 84% that their investments have the power to help lift people out of poverty6. Companies are being forced to shake up their corporate social responsibility (CSR) strategies to meet the more demanding requirements of ESG-minded consumers and investors of all ages.
“A growing number of investors want to see the impact companies are having, not just the numbers,” says Scott. “If you are sponsoring a school, they want to know how many children are advancing into higher education or employment. Donating to your local football team and writing about it in your annual report is not good enough anymore.”
Provenance is of growing importance as consumers demand to know more about where their goods are sourced. The Rana Plaza disaster in Bangladesh was a wake-up call for many companies in this respect.
More than 1,100 people were killed when the complex of clothes factories and shops, on the outskirts of the Bangladeshi capital of Dhaka, collapsed in 2013.7 The disaster brought calls for an overhaul of the supply chains of major fashion retailers, after it was revealed many had been supplied clothes from Rana Plaza.
Scott says: “Since then we had seen many companies publish policies about suppliers and whether their clothes are made from ethically-sourced materials.”
However, as demand for ESG investment strategies continues to grow, a lack of comparable industry-wide data remains a problem. Financially, two companies may be easy to compare but from an ESG perspective it is often much more difficult. More clarity is needed across the industry if the needs of the emerging generation of investors are going to be met.
“The way that companies present ESG data is often very different,” says Loudon. “That can be confusing in terms of trying to identify what the most material aspects are for each business. Governance tends to be easier to focus on, but good environmental disclosure is harder to come by making it more difficult to assess long-term environmental risk.”
Evolution towards more uniform data disclosure is still a work in progress. So are expectations of what investors, millennial or otherwise, want from an ESG investing strategy. Many of the early ESG investment products focused on negative screening. That usually meant excluding so-called ‘sin stocks’, those deemed unethical or environmentally damaging, from portfolios. The definition of ‘sin stocks’ varies but might include the likes of oil companies, arms manufacturers or tobacco firms. However, recently more investment managers have moved towards positive screening, says Scott.
While there is some evidence sustainable investment based on negative screening often led investors to sacrifice returns, positive screening can generate performance that is in line with, or even exceeds market benchmarks.8
As investments created around positive screening build an attractive performance record there is likely to be more demand for products aligned with broad-based environmental and social values. ESG investing could eventually move from being a separate investment theme to the norm.
Scott says: “Successful investing relies on an ability to discern all factors that might influence a company’s valuation, at both the time of purchase and in the future.. One must hope that, longer term, sustainability will “be integrated into all investments products for all people,” she adds.
We might not be there yet, but millennials, with their professed interest in sustainable investing, are likely to encourage the move in that direction. With millennials making up an increasing proportion of the workforce, and also poised to receive more than US$30 trillion of inheritable wealth , the investment industry will soon be dominated by millennial investors.
However, they are not the only generation that everyone from marketers to politicians are keeping a close eye on. Generation Z, also called iGen, are already replacing millennials as the youngest members of the workforce. No generation remains dominant for long.
Generation Zers have a lot in common with millennials, tending to exhibit similar opinions and beliefs to the one before it – just more so. When it comes to environmental issues and having a positive impact on the world they may be even more committed. All of which points to a bright future for investment approaches incorporating ESG concerns.