Millennials and responsible investing
What is Responsible Investing and how can I get more of it into my portfolio”?
This is a likely question advisers’ will be asked from their clients over the next 12 months. Preparation is key.
There are different types of investing that make up Responsible Investing (RI), including: Socially Responsible Investing (SRI), Environmental, Social and Governance (ESG) investing and Sustainable Investing.
RI strategy is on the rise predominantly with women and millennials1 (those currently in their late 20s and 30s) — 86% of millennials are interested in RI, compared with 75% of the general investor population. These are investors who believe that a company’s ESG behaviours can matter to risk and return. Many of those investors also see responsible and impact investing as a strategy to vote with their dollars, financially expressing their beliefs. And we have seen this play out in assets—since 2016, assets in responsible investing strategies has grown 38%.2
It is important advisers understand how clients view RI and how to position it with investors of different ages, as Portfolio implementation is likely to vary depending on the client’s underlying intention. Advisers should not underestimate the potential business benefits of engaging clients about RI. This conversation can provide powerful insight into your clients’ values and priorities – which can form a sound basis for deeper relationships.
Positioning RI with investors of different ages
As you engage with millennials on the topic of RI, consider that different social impact ideas can resonate with different generations.3
- Older millennials (those in their 30s) generally invest more in clean technology, education and agriculture (as opposed to, say, their Gen X counterparts, whose top sustainable holding is in affordable pharmaceuticals). When working with your millennial clients or prospects, you could ask them about their interest in those topics as a start to your conversation about incorporating responsible investing into their portfolio.
- Millennials also feel like they have a lot to learn about investing.4 Only 30% of millennials are very or extremely confident in their ability to make investment decisions. Couple that with the fact that many millennials want a financial professional who is more of a teacher—one who will educate them and customise the investment approach to their needs. Not surprisingly, millennials who work with a financial adviser are typically more receptive to RI.
- One other distinguishing difference is millennials tend to be more risk-averse than their older counterparts. Life experiences shape their comfort with and interest in investing. The formative years of millennials were spent living through the global financial crisis. As a response to that, many millennial investors are more risk-averse than, for instance, their Gen X fellow investors whose formative investment years included the bull market of the 90s. Incorporating ESG factors into the investment decision-making process can be a way to reduce risk in portfolios. This fits well with the typical millennial’s aversion to risk.
- Millennials also tend to spread their assets over multiple advisers and a wide range of products. Here again is another opportunity for you to help them have a total view of their investments and develop a plan to help them reach their long-term investment goals.
Five common portfolio implementation approaches for RI.
- Exclusionary / negative screening - This is the oldest type of RI; avoiding securities based on values. Commonly thought of as ‘socially responsible investing.’ An example might be a religious person screening out ‘sin’ stocks from their investment portfolio.
- Impact investing - Investing with the intent to generate and measure social or environmental benefits alongside a financial return. Examples might be community banking or microfinance investing.
- Best-in-class selection - Preferring companies with better or improving ESG scores relative to peers. This might include investments in companies with a better environmental or human rights record than peers. Compared to exclusionary screening, the “best-in-class selection” approach takes a more positive view, choosing companies with more favourable ESG factors.
- Thematic investments - Investments that are based on trends or structural shifts, like social, industrial and demographic trends. Examples might include investments related to clean energy, animal welfare or diversity on corporate boards.
- Shareholder advocacy/engagement - Shareholder engagement gives investors a voice in the boardroom; it’s a form of activism. Active ownership (exercising stock ownership rights) works to affect change with company management on ESG issues. This can take the form of actively voting shares in a targeted manner, direct engagement with management and/or board, or filing shareholder proposals.
The bottom line
Millennials have a strong interest in RI as both a way to live their beliefs and limit risk. They also recognise they have a lot to learn about investing. Be prepared for these conversations – the key is asking clarifying questions and listening carefully to unpack the best way for clients to achieve their RI goals. As a trusted adviser to your clients, you can both educate and develop a financial plan that addresses their specific preferences in investing.
1 Morgan Stanley’s 2017 “Sustainable Signals” report as an example
2 US SIF Foundation 2018 Trends report
3 The Generation Project, by Oppenheimer Funds
4 Uncertain Futures: 7 Myths about Millennials and Investing, by FINRA and CFA Institute