Generational shifts on ESG investing and sustainable development
As more millennials make up the pool of investors, their unique generational focuses and values influence sustainable and responsible investing strategies
ESG Investing has become a hot button topic in the world of finance and has been on the rise, influencing investors and wealth managers alike. Also referred to as sustainable investing, socially responsible investing, or values-based investing, ESG has become an increasingly popular route for investors to consider companies they may want to invest in. ESG refers to Environmental, Social, and Governance criteria and comprises a set of standards employed in a company’s operations. This can indicate a responsible organization and by screening for ESG criteria, investors can be better equipped to make financial decisions in accordance with their values (Investopedia). With global warming on the rise, there is also a rising trend in investors taking interest and a stance in more values-based investing that factor in climate issues.
Each factor in ESG criteria and reporting focuses on a specific subset of importance for an organization to manage their risk and impact:
Environmental criteria (E) focuses on the impact a company has on environmental factors, the magnitude and measurement of carbon emissions, its involvement in sustainable development, and concern for nature and its resources. This may consider factors such as pollution, waste, deforestation, and biodiversity (Nordea).
Social criteria (S) refers to how the company manages its relationship with its employees and the people involved in the production and interaction of the product, whether that be customers, suppliers, or the communities involved (Investopedia). This may consider working conditions for health and safety, labor rights, as well as diversity (Nordea).
Governance criteria (G) centers around the leadership of the company, the executives and their interactions, audits, internal controls as well as shareholder rights (Investopedia). This may consider factors such as corruption, bribery, tax issues, and internal control (Nordea).
Sustainable investing is not entirely new per se, as the first sustainable mutual fund became available in the 1970’s, however, such types of investing have seen notable and driven success within the past 10 years (CNBC 2021). Climate change appears to be the greatest issue that this generation is facing, and ESG concerns are growing and gathering more interest, notably with investors of this generation. Millennials in particular, which MSCI refers to as those born between 1981 and 1996, are beginning to make up more of the total pool of investors. In 2020, these individuals were between 24 and 39 years of age and have entered their prime earning years, according to MSCI. Their values surrounding the climate issue have spurred an uptick in ESG investing and have drawn attention and interest from investors of all generations. With the massive transfer of money from baby boomers to millennials, which MSCI reports to be 30 trillion in the next few decades, the nature of investing is shifting to reflect new values and focuses. Based on this report, “95% of millennial investors were interested in sustainable investing as of 2019, up 9 percentage points from 2017” (MSCI 2020). Additionally, 57% of millennial investors deliberately chose to stop investing in or decided not to initiate investing in companies that posed harmful impacts on people’s health and wellbeing (MSCI 2020). At an aggregate level, investors across the board are interested in ESG investing, it is not siphoned to millennials by any stretch, but the millennial shift tells a particularly interesting story in this development.
Conventionally, the realm of sustainability and its practices have been regarded as rather incongruent with profitability. It has taken a back burner to lucrative but environmentally harmful investments such as oil companies. As organizations compete in a changing world and economy, those who manage risk and negative impact better with ESG criteria are proving to have their own business advantages - and are uniquely appreciated by their shareholders.
Investing in companies committed to sustainable development that place focus and value on people and planet offers a powerful way to direct one’s financial resources in a meaningful way. By going the ESG route one can actively avoid stocks, bonds, funds, or other equities that may pose harm to others, the environment, or otherwise have destructive effects that the investor may not wish for or intend. The success that ESG investing has seen in the last decade has contributed to an exciting trend and an encouraging prospect for values-based investors. For many, this indicates a positive direction as companies on a larger scale are taking on ESG standards, upholding responsible practices, and undertaking sustainable goals. Until next week, stay savvy.
Disclosure: Investing presents a level of risk, and this article is not intended as investment advice but rather a discussion and commentary on trends and related issues.
Adamczyk, Alicia. “Millennials Spurred Growth in Sustainable Investing for Years. Now, All Generations Are Interested in ESG Options.” CNBC Make It, CNBC, 21 May 2021, www.cnbc.com/2021/05/21/millennials-spurred-growth-in-esg-investing-now-all-ages-are-on-board.html.
Chen, James. Environmental, Social, and Governance (ESG) Criteria, Investopedia, 15 June 2021, www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp.
“Swipe to Invest: the Story behind Millennials and ESG Investing.” MSCI ESG Research LLC, Mar. 2020, www.msci.com/documents/10199/07e7a7d3-59c3-4d0b-b0b5-029e8fd3974b.
What Is ESG?, Nordea , 31 Mar. 2021, www.nordea.com/en/what-is-esg.