The Times’ Raconteur supplement: Why impact investing isn’t just for millennials

The young are vocal about climate change, pollution and inequality. Last year, Swedish schoolgirl Greta Thunberg was catapulted to fame when her climate protest sparked an international wave of school strikes. The youngest-ever US congresswoman Alexandria Ocasio-Cortez has been making waves with her Green New Deal.

One of the most powerful recent appeals, however, comes from Sir David Attenborough and his documentary series Our Planet. Not exactly a millennial, you may note. After all, it’s not just so-called snowflakes who care about global warming.

It could be questioned whether the focus on millennials has led to less money being invested in the sector

When it comes to tackling climate change and inequality by investing in companies that work on solutions, sustainable investment has been on the rise. Also known as socially responsible investing, this approach uses environmental, social and governance (ESG) factors to asks questions such as: How well does this company treat the workers in its supply chain? How many tonnes of carbon has it managed to avoid? What’s the ratio between the chief executive’s pay and that of the lowest-paid employee? How diverse is the company board?

Millennials have been a driving force of ESG investing. Of those investors aged 25 to 34, some 53 per cent go for sustainable funds, while 28 per cent of those over 65 do the same, according to Schroders Global Investor Study 2018. But have investment companies placed too much emphasis on courting millennials, when ESG should be a universal issue? And what impact has this millennial focus had on the market so far?

What impact has the focus on millennials had so far?

When trying to appeal to millennials, there’s a danger that some companies “stick on a badge or a graphic of the UN sustainability goals, without any substance”, says John David, head of Rathbone Greenbank.

“It could be questioned whether the focus on millennials has led to less money being invested in the sector,” says Jeannie Boyle, director and chartered financial planner at EQ Investors, noting that millennial graduates have larger amounts of debt than previous generations.

On the upside, Ms Boyle says the focus on millennials has encouraged innovation. It’s largely thanks to younger investors that “we have seen a pressure on providers to reduce their charges”, adds Philippa Gee, who runs Philippa Gee Wealth Management. She says younger investors also demand more passive products and digital products. These changes have benefited all generations.

“Millennials may well be the more conscious generation,” says George Latham, managing partner at sustainable asset manager Wheb. “And they had some galvanising effect on older generations, who have more money to invest.” After all, generations influence each other. “There’s nothing wrong with focusing on millennials, because the intergenerational dialogue is very powerful,” he says.

Intergenerational dialogue can encourage ESG investing

What’s more, we are on the cusp of one of the greatest wealth transfers in history. In the United States, it has been estimated that baby boomers may pass down some $30 trillion to their children and grandchildren. This transfer creates intergenerational dialogue. Should financial companies with an ESG focus pay more attention to the older end of the spectrum?

“When it comes to legacy, we do see more clients thinking about the impact of their investments,” says Simon Gibson, chief investment officer at wealth manager Mattioli Woods. “Climate change is clearly the top issue here.”

What are the questions financial advisers are hearing? “We’re finding more and more clients in their mid-40s to 60s are interested in what they refer to as ethical investing,” says Mark Fisher, director at chartered financial planners Ardent in York. He says clients don’t often specify what that means, but assume tobacco companies are excluded, for example, while companies that “do good” are included.

Tanya Pein, a responsible investment adviser, agrees that the intergenerational dialogue is strengthening. She says: “Young people rightly point out that the investment industry is largely run by people too old to bear the brunt of the decisions they currently take. Increasingly, the school strikers are being joined by their parents and also grandparents. Why? Because action on climate heating and environmental justice is a multigeneraional issue.

What can companies do to include all generations?

Can financial companies do more to include all generations? “The wider issue across all generations is that savers are disengaged from what their money is doing,” argues Mr Latham. Over the last few decades, the industry has created more and more benchmarks, indices and terms like smart beta that are steps removed from the actual services and products a company provides. “It has become very layered,” he says, adding there’s an opportunity for companies that focus on ESG to show savers of all ages what their money is actually going towards.

For pensions, more needs to be done to include ESG investments. As Mr Fisher notes, many millennials, who are auto-enrolled into a workplace pension, are investing in “default funds that don’t have an ethical option”. He mentions one client, who works for a charity: “She was surprised to learn that her pension was not invested ethically and went storming off to HR.” Ms Boyle echoes this concern. “More needs to be done to incorporate impact investment choices into defined contribution pension plans,” she says.

Wealth managers can do more to include ESG options in their offering. “The European Union has recently agreed new ESG requirements under MiFID II [Revised Markets in Financial Instruments Directive],” says Emma Foden-Pattinson, an investment manager at Charles Stanley. She notes that by 2020, it will be a requirement that all wealth managers confirm their clients’ ESG preferences on an annual basis.

What’s next for ESG?

In the past, people assumed ESG investing has lower returns, but that’s no longer the case. “We are now seeing companies whose activities are underpinned by a solid ESG policy delivering superior returns to their peers,” says Ms Foden-Pattinson.

The discourse is changing from personal values to broader sustainability issues, argues Kate Elliot, senior ethical researcher at Rathbone Greenbank. “What types of companies will survive and deliver the products that address climate change?”

A “confluence of factors” are creating momentum for ESG among all investors, says Maxime Le Floch, an investment analyst at Hermes. There is higher awareness, more information available and new environmental policies in countries including China. Meanwhile, the need to address these challenges is urgent. As Mr Le Floch concludes: “It seems there is a tipping point now.”

This article was originally published in the Times Raconteur supplement on 21 July: https://www.raconteur.net/finance/impact-investing-millennials

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