Now that you’ve got a job and are thinking about more than how to pay next month’s rent, are you ready to start putting your money to work?
I’ve got two words for you: impact investing. Millennials focus much more than previous generations on environmental, social, and governance (ESG) factors when evaluating the businesses they invest in. Put another way, millennials want to do more than make money; they want to have a positive impact on the world.
Using ESG as a filter for choosing where to put your money is a growing trend that has the potential to solve problems like global warming and feeding the world’s expanding population that can’t be tackled by philanthropies and governments on their own, according to Matthew Weatherley-White, managing director and cofounder of the Caprock Group, which uses ESG strategies.
While companies set short-term strategy based on consumer demand, their long-term use of capital is highly influenced by investors. Tying investments to how companies use the money can lead to changes over time, says Weatherley-White. For example, the burning of coal has declined, not because boycotts worked, but because it’s not as efficient as other fuels.
Assets under ESG investment management are growing steadily. According to Casey Clark, vice president of investment strategy research at Glenmede, the asset management company saw a 34 percent increase during the first nine months of 2016 in the number of clients who consider impact investing an important offering. The Forum for Sustainable and Responsible Investment (US SIF) says about $8.1 trillion in assets are invested using ESG factors, up 33 percent from 2014.
Millennials will play an increasingly important role in popularizing ESG investing as their earnings rise and they invest some of the $59 trillion they will inherit, according to a report by the Center on Wealth and Philanthropy at Boston College. Millennials invest in ways that match their lifestyles and beliefs. According to Schroders Investment Management, millennials place a greater importance on ESG than older investors and rank them equally as important as returns. Millennials are 15 percent more inclined to stick with an ESG-oriented investment, according to Schroders, and the importance of ESG factors decreases steadily up through the generations, with retired investors aged 65 and older caring the least.
What do millennials care about in particular? Climate change is one of the biggest millennial concerns. But according to Schroders research, the most important ESG driver is good corporate governance, followed by good social responsibility, positive environment impact, and positive social outcomes.
Jessica Ground, global head of stewardship at Schroders, says that millennials are also interested in nutrition labeling, vegan/vegetarian food, bribery and corruption, transparency, and business ethics. Glenmede’s Clark highlights an interest in unfair distribution of wealth, privilege, and opportunity concerns. Millennials want to create a dialogue with managers and companies on their investments and they are asking pointed, well-researched, and challenging questions of their asset managers, he says.
How does ESG investing work? Part of Glenmede’s investment strategy is publishing research on impact investing and helping build portfolios to address both mission and financial goals. ESG portfolios respond to millennials’ concerns, sometimes by reaching out to companies through shareholder engagement and other times by the targeted divestment of funds. Asset managers try to publish the work they do and the questions they ask companies.
Impact investing that focuses on ESG factors, by all accounts, is a slow, sustained shift. Change will come from millennial consumer demand, millennials choosing to work for more ethically minded companies, and millennial investment.
Weatherley-White of Caprock hopes that ESG factors someday will be fundamental to all investing. He believes that the rise of impact investing will shift cultural norms, encourage the regulatory environment to evolve, and shift corporate behavior. When he gave a talk at Oxford’s Said Business School last year, 70 percent of the student body showed up, most eager to find a job in a mission-driven enterprise.
These millennials are investors, not activists. They don’t practice philanthropy; they practice capitalism. And they’re making the rest of the world notice.