By Richard Hubbard
The huge global investment industry is currently undergoing a radical transformation caused by the fairly recent discovery that millennials are very different from their baby boomer parents — and that they are about to inherit great wealth.
As the baby boomers retire, millennials — loosely defined as those born after 1982 and before 2004 — will make up over a third of the global workforce by 2020. Many will also be on the receiving end of one of the biggest transfers of wealth from one generation to another in history.
When you look at the money that is held by fund managers around the world, the investment power that comes with this transfer is immense.
Worldwide, the amount of money held by the investment industry, usually on behalf of the older members of society who have accumulated their savings during their lives, was estimated to be just over $50 trillion at the end of the second quarter of this year, according to the European Fund and Asset Management Association.
Research by U.S. bank BNY Mellon has found that millennials, who look set to inherit much of this or begin to invest their own savings with the fund management industry, are mostly ethically minded, place great value on corporate social responsibility and have a healthy respect for the environment.
Collectively, the financial world calls these factors ESG, which stands for environmental, social and governance.
They will invest as long as there is a meaning behind it.
BNY Mellon found some 86 percent of millennials are interested in sustainable investing, defined as investing in companies or funds that aim to generate market-rate financial returns while having a genuine and positive social or environmental impact.
“Global recognition of ESG issues is driving a major shift in investor attitudes,” BNY Mellon said in a recent report.
“Investors increasingly understand that neglecting ESG considerations can not only make poor ethical sense but can also heighten the risk of financial loss in their portfolios.
What this means for the finance industry is that, in addition to using well-established metrics such as price/earnings ratios or return on equity projections to justify an investment decision, a fund manager will have to be able to answer the question: “What impact will my investment have?”
Or as one senior banker put it to me: “If you’re asking millennials what would make them invest in something, they will do it as long as there is a meaning behind it.”
BNY Mellon found that 75 percent of millennials believe their investments can influence climate change and 84 percent that their investments have the power to help lift people out of poverty. So these might become a fund manager’s top priority — and for those of us who have been covering this industry for many years, that’s a big change.
A major and very welcome change
Another transformation will likely be felt in corporate behaviour.
“Companies are being forced to shake up their corporate social responsibility (CSR) strategies to meet the more demanding requirements of ESG-minded consumers,” Lindsay Scott and Paul Loudon of Edinburgh-based investment managers Walter Scott wrote in the BNY Mellon report.
As a journalist who has covered financial markets for more than 30 years, this is another sea change.
Many people of my generation only really discovered financial markets in the 1980s after leaders such as former British Prime Minister Margaret Thatcher began selling off state-owned enterprises, making shares more widely available, while at the same time technology liberated financial information from the grip of stockbrokers.
Throughout the 1980s and 1990s, as we all wrote about financial market performance, the focus was rarely on a company’s social impact or on its environmental policy unless these affected its business dramatically. Our interest was largely confined to coverage of profitability, new products or investment plans.
The strong commitment to sustainability issues expressed by many millennials, and their increased spending power as they age, underscore a major and very welcome change. And along with it will come a very different look to the business pages of your favourite media website.
QUESTIONS TO CONSIDER:
- Recognition of environmental, social and governance (ESG) issues is driving a major shift in investor attitudes. In what ways can these factors actually improve a company’s performance?
- The United Nations has supported six Principles for Responsible Investing. What impact are these really having, and do they overlook anything important to you?
- In what way is the greater prominence of ESG factors influencing your own spending and savings activities or the way you look at the world of work?
Richard Hubbard is a finance and economics journalist with more than 30 years reporting from Australia, the UK, Asia and the United States. He is currently group editor for Last Word, an independent publishing company based in London. He was formerly Global Markets Correspondent for Reuters. He covered the Asian financial crisis of the late 1990s from Hong Kong and Singapore, and later the run up to the 2008 financial crisis and its aftermath.