In the transfer of wealth from baby boomers to millennials, the latter are poised to receive more than $30 trillion worth of inheritance. This massive wealth transfer is the reason fund managers are increasingly allocating resources to develop products that target this emerging client base.
As millennials begin to engage with wealth and asset managers, they’ll continue to disrupt the industry due to the sheer size of their cohort. One of the key ways they’re doing this now is by choosing to invest in companies that have a measurable social and environmental impact in addition to giving them competitive financial returns. They recognize that as population growth continues to exceed available resources, the global demand for food, water and cleaner energy creates a need for innovative improvements in order to address these issues. Millennials want a greater level of integration between their wealth and values, to achieve personal fulfillment (intrinsic returns). This means contributing positively to society and the environment for the benefit of future generations.
What is ethical investing?
Ethical investing, also known as socially responsible investing (SRI), is the process of incorporating environmental, social and governance (ESG) factors into investment decisions. A recent survey conducted by the Responsible Investment Association (RIA) showed that over 75% of investors are interested in ESG products, and 82% of investors allocate a portion of their portfolio towards ESG investment vehicles. Sustainable investment vehicles may meet – and sometimes even exceed – the performance of comparable traditional investments. For instance, the outperformance of the MSCI KLD 400 (an index which contains firms that have met a very high ESG standard) in comparison to the S&P 500 clearly demonstrates that strong financial performance coupled with values-based investing is extremely attractive, especially to millennials.
In addition to financial metrics, analyzing a company’s ESG performance gives a more holistic picture of a company’s quality of management, along with its long-term prospects for success. There’s a growing trend where investors have recognized the opportunity for better risk-adjusted returns, while at the same time contributing to positive outcomes pertaining to social and environmental issues. Over the past few years, we’ve seen a professed interest from millennials for sustainable investments, along with a significant movement of client funds into ESG products.
There’s a growing body of international evidence that suggests millennials are increasingly driving the demand for ethical investment vehicles that incorporate environmental, social and governance criteria. According to a report by the Morgan Stanley Institute for Sustainable Investing, millennials are nearly twice as likely to invest in companies or funds that target specific social or environmental outcomes. In addition, 84% of millennials insisted on investing in ESG products as a central goal. It’s becoming more evident that the demand for sustainable investment products is being driven by millennials who prefer to invest in alignment with their personal values.
The rise of globalization has brought about greater awareness that our world is increasingly interconnected, which, in turn, has positively impacted social behaviour. Furthermore, the dramatic increase in global travel has exposed people to other cultures and societies, helping reduce personal bias and ignorance. This makes some of us more likely to empathize with global issues and seek to correct them.
The general trend in human demographics is that the younger generation always strives to improve on the models, ideas and values that have been passed on from the previous one. Millennials seem to have a much closer connection to global social issues than their predecessors and have a strong conviction to make a difference. This conviction is expected to grow with the next generation (Generation Z). Both generations seem to take a progressive approach to investing, recognizing that our actions and words affect not only ourselves but can impact everyone’s lives in some shape or form. You could say that millennial investors are putting their money where their mouth is.
Sameer Amin, Research Analyst
This article was published in T.E. Wealth’s Strategies newsletter, March 2019 edition. Read the full edition here.