Markets as mirrors: Millennials and the growth of sustainable investing
Tapping into ESG concerns key to securing investment growth
We are on the cusp of the largest inter-generational transfer of wealth ever experienced, with more than $30trn projected to fall under the control of millennials (those born between 1981 and 1996) over the next 20 years in the US alone.
Yet this generation, about to hit their prime spending years, is also acutely aware of the escalating risks that climate change and unsustainable business practises pose to the planet they are inheriting and their spending reflects this.
But will we see the values of this environmentally aware generation mirrored in the markets?
If their consumer preferences translate into investor preferences then the market for sustainability funds could be set to expand rapidly.
ESG drives outperformance as 'social' focus begins to see gains
Millennials are nearly twice as likely to have made a purchase because of a brand's environmental or social impact and 73% are prepared to pay more for sustainable goods, therefore companies that successfully tap into the zeitgeist could be well positioned to reap the benefits.
Some 30 years ago, the field of sustainable finance barely existed.
Now there is more than $23trn invested in strategies that incorporate some type of sustainable investment approach, equating to 26% of professionally managed assets, and with an ever-expanding range of strategies encompassing approaches such as screening of controversial assets, thematic investing and the integration of environmental, social and governance (ESG) issues in fundamental analysis and index products.
Shaping the market
However, social mores do not always shape the market; the social activism of 1960s 'baby-boomers' on equal rights and pacifism did not translate into their investments or market changes.
So why is it that 84% of millennials cite investing with a focus on ESG impact as a central goal and millennials are achieving greater integration of their money and values than previous generations?
The answer is that sustainable finance is part of a more fundamental economic trend driven by more than values.
MSCI: How does ESG impact the performance of companies?
The global economy's non-renewable resource base is under enormous pressure from the addition of two billion people by 2050 and the growing demand for food, water and energy.
Climate change and pollution compound the problem. Governments are now committing to aggressively decarbonise, and catalysing infrastructure investment and technological innovation.
This transformation requires capital, estimated at $93trn and as we know, significant capital requirements have always been drivers of market change.
If governments make commitments to accelerate the transition to a more sustainable economy, then it makes sense that public capital works to that goal too.
The Principles for Responsible Investment now has nearly 400 asset owner signatories globally, representing $25trn of assets under management, a sign that capital is following commitments.
Recently, the world's largest pension fund, the Government Pension Fund of Japan (GPIF), has selected two S&P Global Carbon Efficient indices to serve as the benchmark for their ESG investment strategy.
There are estimates that net inflows into ESG-type funds over the next two decades could equate to between $15trn and $20trn, with expectations that sustainable investing will be the standard approach to investing in the next decade.
This is a trend that is not going away, as such the investment management industry should aim to be a part of these fundamental changes.
Lauren Smart is managing director at Trucost, S&P Global
