Millennial investors are beginning to make moves in the world of investing. In fact, 2018 research from CB insights estimates that, by 2030, millennials are expected to hold approximately $20 trillion in assets.
As a generation that came of age during the financial crisis and the subsequent bull market, many millennials believe investing should be cheap, with even affluent millennials opting to use low-cost robo advisors and passive funds, instead of employing active management strategies.
However, there’s one notable active strategy millennials favor. They are much more interested in assets managed with an environmental, social and corporate governance (ESG) strategy than their Gen X and baby boomer counterparts, according to MSCI.
ESG strategies, are, by definition, a highly engaged form of active investing. So while millennials might not think they want active investing, their interest in ESG says otherwise.
Millennials Put Their Money Toward Their Beliefs
When compared with Gen X, baby boomer and Greatest Generation investors, millennials are less likely to buy conventional blue chip stocks, according to data from Apex Clearing. Instead, they show greater interest in socially responsible investing, and tend to favor investing in companies rooted in technology, disruption and innovation, from Chinese tech companies to video game and marijuana businesses.
By taking the long view on companies such as Tesla, Facebook and Amazon, they are putting their money toward the things they believe in, says Apex. And according to Morgan Stanley's Institute for Sustainable Investing, 86 percent of millennial investors are interested in putting their investments to work for the greater good.
ESG Results Speak for Themselves
While millennial investors may be more interested in the social good that comes from their investments than generations past, they are still interested in seeing returns on those investments, and ESG investing has the potential to achieve both objectives.
A recent report by Axioma found that from 2014 to 2018, portfolios with high-scoring ESG companies outperformed their benchmarks by between 81 and 243 basis points.
This backs up research conducted by the Boston Consulting Group in 2017, which also concluded that companies that commit to higher ESG standards can be more profitable than companies that don’t. In short, the surge in ESG could be a win for both investors and the businesses that embrace these standards.
Millennials Are Engaging in a New Kind of Active Investing
The active engagement model is an evolution from the first wave of socially responsible investing, which involved excluding companies, and sometimes entire industries, that investors viewed as objectionable.
While it seems logical that an asset manager of an environmentally conscious mutual fund would, for example, avoid oil companies, airplane manufacturers or other perceived polluters outright, today’s ESG asset managers know that many of these companies play an essential role in our economy, so it makes sense to help them make positive changes rather than avoid them altogether.
It is important for advisors seeking to leverage the ESG trend to consider the difference between a highly active form of ESG investing designed to promote and inspire positive change versus a more passive form of ESG investing focused on companies that score better than peers today on ESG criteria. In some strategies that use an ESG approach, an asset manager’s efforts can go beyond fundamental investment and ESG research to include directional engagement with organizations to both influence and assist company management in making ESG-related improvements.
One example could be, an asset manager investing in the oil industry recognizing that oil is ingrained in the functioning of the global economy and that oil companies will impact environmental issues for the foreseeable future.
An ESG-focused equity manager may seek companies that are leading the way to becoming more environmentally responsible. The asset manager engages and consults with company leaders to assess, deepen and extend their ESG policies and ensure commitment to change. This could involve advising companies on expanding their ESG initiatives, helping them to tackle weaknesses, putting plans in place to ensure future momentum and reporting on their progress to inspire others within their industry.
A “directional engagement” strategy such as this not only drives the company in question to increase its positive impact on society, it also sends a clear message to other companies within the space that being socially responsible may ultimately be good for business.
Think about the concept relative to traditional fundamental analysis: Do investors achieve excess returns by investing based on what everyone already knows about a company (i.e., the past)? Or from incremental positive change that the market has not already incorporated into the stock price (i.e., the future)? There’s a tremendous advantage in seeking and influencing positive directional change in sustainable practices of particular companies, as the measurement and reporting of such practices is still developing.
While much of the historical focus of social investing has been on equity strategies where shareholders have more influence, ESG fixed income strategies are rapidly expanding. The spectrum of government and corporate bond issuers provide opportunities for fixed-income investment managers to invest with entities that seek to impact a broad range of issues, such as addressing income inequality, fostering economic empowerment, creating jobs and improving environmental sustainability.
Fixed-income managers can invest in both government and public/private partnerships that are supporting small business development, building affordable housing, constructing public transportation or LEED-certified buildings, or improving infrastructure. Corporate bond investors may also incorporate ESG criteria such as reviewing economic activity and job generation, reducing operating resources, enhancing gender and workplace diversification and improving energy efficiency.
The Future Is Bright
Advisors who want to provide a more ESG-friendly portfolio for clients – millennial and otherwise – now have greater options. Growth-minded advisors who want to address these new demographic trends would do well to consider now what their clientele will look like in five or 10 years.In evaluating the expansion of the ESG industry over the past few years, this move towards socially conscious investing seems likely to continue. Staying ahead of the curve by learning about what clients really want could be the difference between running in place and catalyzing future growth.
As ESG investors gain a deeper understanding of the criteria they would like to address within their portfolios, they will become more discerning in their choices.
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