Why Gen X and millennial investors are demanding sustainable portfolios
Over the past five years, investors have been choosing sustainable investments over conventional ones in greater numbers. There have been record numbers of ESG funds and ETFs launched, with assets invested this way in the U.S. totaling more than $8 trillion.
Most wealth advisers say that only a few of their clients have asked them for a sustainable-investment portfolio. And yet when asked, the majority of investors say they are quite keen on the concept.
SURVEY SAYS ...
Morgan Stanley has been doing a biannual survey like this since 2015. The results consistently show that more than 70% of U.S. investors say they are interested in sustainable investing. Over 90% of millennial investors respond in the affirmative. Other surveys show similar results.
What gives? Why aren’t advisers hearing about this demand directly? Are clients uncomfortable asking advisers? Perhaps. But maybe the advisers and surveyors are talking with different investors.
A recent study by Stanford University and the Hoover Institution surveyed investors’ actual holdings, rather than just what they say they’re interested in. They asked investors whether they hold socially responsible funds in their portfolios now. The percentage who do, by generation, are:
- 19% of boomers
- 62% of Generation X
- 78% of millennials and Gen Z investors
This might explain why advisers’ clients haven’t shown much of an interest — they tend to be Boomers. But what about their future clients?
ALL IN ON CLIMATE CHANGE
It might seem obvious that younger generations are more interested in sustainable investing. After all, they are the ones who are going to have to deal with the effects of climate change. According to Yale’s semiannual "Global Warming’s Six Americas" study, the percentage of Americans alarmed or concerned about global warming breaks down like this:
- 59% of Millennials and Gen Z
- 53% of Gen X
- 53% of Boomers
It turns out the generational attitudes about climate change are not that different — and surely not enough to account for the stark split in demand for sustainable investing.
Many Boomers learned to invest around the turn of the century, long before the iPhone was invented. Back then, Modern Portfolio Theory was in the ascendancy. Diversification was sacrosanct. Index funds were getting more popular. Concentrated stock portfolios were old hat. Broad-based portfolios with 100s if not 1000s of stocks were the order of the day. This interaction with markets is mathematical and transactional in nature — I invest capital to receive returns. The idea of excluding an unwanted stock or industry for any reason other than financial wasn’t very popular. What if that excluded stock became the next Amazon? Perhaps it is this investment philosophy that keeps Boomers from investing sustainably.
Younger people probably learned their way around social media before they learned about investing. They learned to post likes and dislikes and share those with their friends. Maybe they liked a picture or product enough that when it blew up, they felt as if they were part of the success. Perhaps they bought something on a crowdfunding platform like Kickstarter or Indiegogo. This interaction with markets is personal and participatory in nature — I invest capital to share in success. These savvy social media types would never intentionally "like" something that they didn’t want to see succeed. The idea of including an unwanted stock or industry in their portfolio is anathema. Perhaps it is this investment philosophy that makes sustainable investing so popular with younger investors.
The term ESG — or environmental, social and governance investing — was only invented in 2005. And for another decade, few ESG investment products were available. Before 2015, it was hard to find a sustainable fund with a good track record. Back then, advisers routinely discouraged investors from investing responsibly. The typical response to a request for a sustainable portfolio was, "You’d be better off investing conventionally and giving money to charity."
There are hundreds of sustainable-investment options now. Many have good long-term track records. Large institutional investors have embraced ESG investing. UBS, the world’s largest private wealth manager, announced in 2020 that it was making sustainable-investment portfolios its standard offering going forward. It is no longer a fringe or niche form of investing. Investors young and old who seek it out readily find solutions. If advisers want these investors as clients, they would do well to offer sustainable investing as an option. Or maybe, given the high interest, as the default.