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12/10/2017

Millennial Investing

When the largest generation in history is also the most socially conscious investor group the market has ever seen, business and social change are converging like never before.

Three quarters of millennial investors regard their investment as a vehicle to make a positive social impact. Value-led spending is key for this generation.

“Millennials are disrupting the traditional models and re-defining consumption”

Priorities for socially responsible investors, particularly those who have grown up against a backdrop of global warming, include addressing climate change, global responsibility and sustainable living. A focus on impact investing – targeting businesses that have an ethical agenda – by the millennial generation is a powerful trend and has led to a rise in the collaborative economy.

The rise in socially aware investing

With sustainable investments currently representing 18 percent of the assets under management in the wealth and asset management industry, this is a real growth area. Couple this with the fact that millennial investors are almost twice as likely to put their money in companies that focus on social or environmental issues, according to research by EY, then the power of sustainability as a motivating factor for spend is even more significant.

The clear shift towards companies with social and environmental policies at the forefront of the business is reflected in millennial consumer spend. Millennials are increasingly buying products that are sustainable despite having a higher price tag, and it is clear that concern over environmental, social and governance (ESG) ratings is a crucial factor. This age group is significantly more likely to invest in companies that have proven high ESG standards than non-millennials.

Investing with Impact

Millennials have grown up exposed to an increasing anxiety over global warming and much wider conversations around climate change than the preceding generation. It is of little surprise, therefore, that clean energy and clean tech are target areas. This is reflected in growth investment in organisations that promote renewables, clean transport, and energy efficient real estate.

Millennials worry about the future of the environment and feel responsible for it. As a result of a keener focus on sustainability and how it manifests in millennial lifestyles, there is much less of an emphasis on tangible products that may pose a risk to the environment or increase landfill sites. Instead, this generation is much more interested in experience and quality of life.

“Living experiences, rather than consuming or accumulating goods, helps them connect better with their friends, communities and people around the world,” notes Julie Saussier, senior equity analyst of consumer goods at Credit Suisse.

This is also mirrored in leisure and lifestyle spend, which are increasingly characterised by a heightened preoccupation with the effect of carbon footprints in the shipping of consumable products. Millennials care where their food comes from, and are prepared to buy products sourced locally despite the associated price tag.

The significant uptick in investment in sustainable businesses is being led by millennials, but the irrefutable need for it is also a driving factor. The global population is growing by such a rate that there is mounting pressure on resources. Looking ahead, this is a source of anxiety for a generation increasingly looking to their own children’s future. Macro- economic patterns are signposting the way for an ongoing hike in sustainable environmental spend.

Support for electric bill surcharges for developing renewable energy was highest among millennials. In addition, as they are used to benefiting from the sharing economy, they also have the greatest interest in community solar power.

The closing gap between sustainability and profitability

There hasn’t been a greater coming together of investment and social consciousness before. The generation of investors coming to maturity are bringing about a wave of new consumer behaviour with businesses responding to changing priorities. Millennials’ shared values is the blend of profit-seeking through investment and global responsibility, and with this group poised to receive more than $30 trillion of inheritable wealth, according to EY, it is a trend that companies cannot afford to ignore.

As digital natives, millennials are disrupting traditional models and redefining consumption, with millennial brands emerging. This generation is the agent of change that we need in an era defined by growing sustainability and climate concern.

22% of total AUM in the US are sustainable investments.

Many millennials want to put their money towards companies and funds that are helping to do things like alleviate poverty, protect the environment, or further human rights around the world. They want to generate ROI in both financial and social spheres.

Over the last decade or so, the amount of assets under management (AUM) for sustainable investments has ballooned to a whopping $8.72 trillion in the U.S. for 2016:

Since 2014, that’s a 33% increase – and even more interestingly, sustainable investments now make up 22% of the $40.3 trillion of total AUM in the United States.

Why is sustainable investing so popular among millennials? Here’s a rundown, mostly coming from recent research from Morgan Stanley:

– Millennials are putting money in sustainable investments at a rate 2x higher than average.

– 86% of millennial investors say they are “very interested” or “interested” in sustainable investing.

– 61% have made at least one sustainable investment action in the last year.

– 75% think their investments can influence climate change.

– 84% think their investments can help fight poverty.

And with a $30 trillion wealth transfer coming to millennials over the coming decades, this preference of using investments as a vehicle for creating positive social change is more than just a trend.

The Big Question

There does remain one big question that millennials and wealth managers are focused on: do sustainable investments provide similar financial returns to regular investments?

Millennials are willing to take a risk that they don’t – in fact, Morgan Stanley found that 59% of millennials believe that there is a trade-off between social impact and financial returns.

Interestingly, some data is already providing a counterpoint to this narrative. In a report from Morningstar and WSJ, for example, it’s shown that funds focused on sustainable investments have offered superior performance to non-sustainable investments over periods of one, three, five, and 10 years.

Whether this stays true for the future remains to be seen – but it will be an important and fun metric to watch.

By Nishad MUKHERJI

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