Millennials to drive the ESG investing revolution
Millennials, the largest generation in history, with an estimated population in excess of two billion, are clearly a major force to be reckoned with.
They have already brought about big changes to the world we live in, and they will continue to drive changes in many areas.
For one, these individuals who have grown up with digital technology, have played a big role in the fourth industrial revolution, which continues to transform the world through the intensive use of technology including smart and autonomous systems fuelled by data and machine learning.
Moving forward, millennials look set to take the lead in the ESG revolution – a mega global trend that is quickly gathering momentum.
ESG investing involves considering Environmental, Social and Governance factors along with financial factors when making investment decisions.
Historically, investment decisions have often been based on financial factors.
But, in recent years, there is a growing emphasis on non- financial factors as well – to ensures that the environment, society and minority shareholders are protected too.
Millennials show propensity for ESG investing
An OCBC Bank survey of millennials two years ago showed that they are interested in bigger societal issues. The top five most important social causes millennials care about are human rights (82%), poverty (81%), the environment (79%), helping the elderly (79%) and mental health awareness (79%). Many of these issues go to the heart of ESG.
ESG is becoming a key driver for investment decisions. A growing number of investors, especially millennials, are not only interested in the financial outcomes of investments. They are also interested in the impact of their investments and the role their assets can have in promoting global issues such as climate action.
Data from OCBC’s RoboInvest – a robo-investment platform based on algorithm technology – reveals some interesting findings about millennials. The platform offers several investment portfolios including an Impact Investing portfolio that focuses on environmental themes, offering exposure to companies screened for ESG characteristics including clean energy and sustainable water solutions.
Interestingly, close to 80% of those who invest in OCBC’s Impact Investing portfolio are Millennials who are below 40 years of age. The average investment amount into Impact Investing has more than doubled compared to 6 months ago. Those aged between 21 to 29 invested 60% more into Impact Investing than traditional asset portfolios, such as precious metals.
However, it was not just the younger Millennials who are active on the OCBC RoboInvest platform. Investors aged 50 an above, also invested three times more in their Impact Investing portfolios compared to 6 months ago.
Does doing the right thing affect returns?
Narrowing one’s investment opportunity set to just companies that do well on the ESG scale invites the question if investors are unnecessarily sacrificing returns just to do good. Afterall, investing is about earning financial returns over time.
A 2018 review of academic research by the NYU Stern School of Business and quantitative investment firm QMA suggests that the answer is an unequivocal no. There is no strong evidence of a significant difference in the returns earned by firms with high or low ESG ratings. Instead, their research shows that companies with better ESG profiles tend to be able to borrow more cheaply and enjoy higher credit rankings and lower cost of equity capital. Essentially, companies with better ESG scores are better quality assets.
The call for social responsibility and collective action has triggered a movement. ESG and socially responsible investing has taken root. It is moving out of a niche territory into the mainstream.
There is a growing realisation that more and more global fund managers will shun companies that do not embrace ESG.
A useful signpost of the growing acceptance of sustainable investing in the world today is the steady rise in the number of signatories committing to the UN-led Principles for Responsible Investment.
Nearly 2,400 asset owners and managers representing US$86.3 trillion in assets under management (AUM) globally have signed up so far. This is a marked improvement from 2006, where only 63 asset owners and managers with US$6.5 trillion worth of AUM endorsed the UN principles.
So ESG is becoming a key driver for investment decisions by international portfolio managers, who control billions and even trillions of dollars.
According to Pensions & Investments, the value of global assets applying ESG has doubled over the past four years, and tripled over the past eight years, to more than US$40 trillion in 2020.
Data from Morningstar showed that global sustainable funds focused on ESG-related issues attracted a record inflow of US$185.3 billion in the first three months of this year, a 17% increase over the prior quarter. The surge marked the fourth quarter in a row of record highs.
So, clearly, ESG is a fast-emerging theme that investors cannot ignore.
The transition to a more environmentally friendly, socially responsible, and climate-resilient global economy will introduce new opportunities for investment and growth.
As higher-quality ESG metrics and industry standards are developed and more ESG-focused products are introduced, we see increasingly greater opportunities for investors to align their portfolios more closely with their own sustainability preferences and goals.
Chasing the Millennial money
Indeed, the greatest champions of socially responsible investing are millennials.
The US Trusts’ Insights on Wealth and Worth 2018 survey indicated that 87% of high-net-worth millennials considered a company’s ESG track record as an important consideration in their decision about whether to invest or not.
Meanwhile, a 2019 Morgan Stanley Institute for Sustainable Investing survey of high-net-worth investors found that 95% of millennials were interested in sustainable investing.
More recently, a 2020 survey of millennials and Gen Z individuals by Deloitte indicated that climate change or protecting the environment is a top concern.
The demand for a better world among millennials is understandable given the fact that it is their generation that will bear the brunt of deteriorating environmental conditions and worsening social structures.
Better education, an increasingly global perspective due to social media and greater awareness about these present problems have led millennials and Gen Z to favour sustainable businesses. Indeed, they want to do the right thing and they are demonstrating this by investing in ESG.
The onus will be on financial institutions like ours to enable millennials to let their investments work alongside their core beliefs.
This article was contributed by Vasu Menon, Executive Director of Investment Strategy, and first published in The Straits Times on 17 May 2021.