The transfer of wealth to millennials has been a big factor in the rise of sustainable investing. How can wealth managers ensure they have the ESG tools and information to seize upon opportunities presented by this new generation of investors?
- Sustainable investing meets and often exceeds the performance of comparable traditional investments, both on an absolute and a risk-adjusted basis.
- The transfer of wealth to millennials and regulatory requirements represent the perfect opportunity to drive ESG investment adoption into a higher gear.
- Wealth managers need to be able to measure their relative ESG performance if they want to capitalize on the trend of sustainable investing for millennials.
The largest-ever, inter-generational transfer of wealth is expected to result in some US$24 trillion being under the control of the millennial population as early as next year.
These young investors want to make a positive impact through their investment choices and are increasing the demand for sustainable investing strategies and products.
In doing so, they are providing wealth managers with a valuable opportunity to guide the next generation of investors — and lock them in as lifetime clients.
Trends in Millennial money
A recent survey from Schroders found that younger people — those between 18 and 44 — are significantly more likely than those aged 65 and over to consider their carbon footprint.
Fifty-two percent of those aged 18 to 34 put money in sustainable investments rather than funds that do not consider sustainable factors, while only 28 percent of those aged 65 and over took this approach.
This demand for sustainable and ethical investing matches the way millennials tend to live.
They’re growing accustomed to a cashless, sharing economy, driven by today’s technological innovation, and they’re applying the same to their investment requirements.
Sustainable investing returns
Until recently, “impact” investing carried the stigma of positive change at the expense of strong financial performance.
Seventy-six percent of the Schroders survey respondents said sustainable investing had become more important to them over the past five years, but 25 percent said they were put off by concerns they wouldn’t deliver as good a return as non-sustainable investments.
Yet the data shows these concerns to be unfounded.
A study from Morgan Stanley’s Institute for Sustainable Investing found that investing in sustainability meets and often exceeds the performance of comparable traditional investments, both on an absolute and a risk-adjusted basis, across asset classes and over time.
The study also showed lower median volatility for the funds and separately managed accounts, because companies that score well on ESG metrics also tend to be less vulnerable to negative headline risks, large-scale lawsuits, or environmental risks.
Regulation and ESG investing
In September 2015, all 193 member states of the United Nations adopted Sustainable Development Goals (SDG). The 17 SDGs and 169 individual targets will guide the world’s sustainable development priorities from now until 2030.
The objective is to spark action “in areas of critical importance for humanity and the planet”.
As a result, sustainable investing has become the business of regulators and is here to stay — creating a significant opportunity for the financial community — including the wealth management industry.
Investors and analysts are calling for more guidance on how they can integrate ESG data into their analysis and develop successful investing strategies for their clients.
They require trusted and standardized ESG data to develop a series of ESG products to meet the growing demand in the market and make more informed investment decisions.
The ball is already rolling. Last year saw a record inflow into funds and products that promote solid ESG practices at investee companies. Wealth managers will need to pay close attention to how this regulatory landscape shapes up.Together, the transfer of wealth and the upcoming regulatory requirements represent the perfect opportunity to drive ESG investment adoption into a higher gear.
ESG reporting standards
Despite this momentum, the Schroders report says a lack of information still represents a barrier to sustainable investing.
However, vendors and information providers are able to address this need. At Refinitiv, we provide ESG data to help wealth professionals understand and measure their relative ESG performance and impact, benchmark against peer companies, and evaluate best-in-class examples.
It can help align the sustainable investing efforts of investors with industry standards, respond to the growing demand for ESG investments, retain the best and the brightest talent, and enhance risk management across the investments.