Millennials drive push into socially responsible investing
By Neil Dennis
15:50, 1 June 2017
Let's not look unkindly upon Millennials as the plastic pop-loving and celebrity-obsessed freaks we see in the media, for study of this much-maligned generation reveals a sophisticated and market-leading force – and this is true of investment too.
It is the curse of every generation of young people to be scorned by their elders. The "Baby Boomers" copped it for the rise of rock and roll, flower-power and the associated anti-social behaviour so-loathed by the war generation.
Then came "Generation X" – the punk rock and rave generation that drove the rise of acid-house and the ecstasy culture. This generation drove the Baby-Boomers – their parents – to similar levels of disgust.
And now the "Millennials" – the sons and daughters of Generation X – are . . . doing what? It appears that such rebellion as there is, is not as visible as in previous youth generations.
Their music and literature isn't telling them to resist the political and corporate machine. So what are they resisting?
Investing for the future
According to this year's annual Legg Mason Global Investor Survey, they are resisting investment for their future. It seems that Millennials - the 18-35-year olds born between 1982-1999 – are not saving enough.
They are surprisingly risk averse, according to the survey, marked by the stock market reactions to the 2001 dotcom bubble and the 2008 financial crisis.
James Norman at Legg Mason, in a recent article for Business Insider, cites a Brookings Institution survey that showed 52% of those aged between 21-36 reported keeping their savings in cash.
But things are always apt to change and, indeed, they may already be doing so. Someone aged 25 today, still has a good 40 years at least left to work, and as they move into their peak earnings years, the compulsion to save becomes stronger.
Millennials investing trends
Many Millennials are now making their voices heard in the world of finance as they lead the push into more ethical areas of investment.
They are ditching oil-, tobacco- and arms-rich portfolios in favour of socially responsible investing and they are convincing a number of high-profile investors to do the same.
In the US, it could almost be an anti-Trump backlash as young investors protest about the US President's climate change denial and apparent willingness to use a pro-business agenda to overturn regulatory oversight.
California's state pension fund Calpers is one of the most highly-visible investors that is attempting to re-align its portfolio towards a more ethical leaning.
Its decision earlier this year, along with Axa, Scor and AMP Capital, to sell all tobacco investments was promoted by World No Tobacco Day.
Their statement read: "We in the investment community are becoming increasingly aware of the important role we can play in helping to address the health and societal impacts of tobacco."
Calpers has previous form – investing in green technologies, bans on investment in arms manufacturers and coal companies – and has gained as much criticism as praise for "playing politics with pensions".
But the trend is rising. And growth in socially responsible assets is as important in this trend as the growth in those wanting to invest in them.
In 2007, Oppenheimer Funds and US trade group SIF Foundation recorded $202bn of investor capital in actively managed in socially responsible investment (SRI) vehicles in the US – including mutual funds, exchange traded funds (ETFs) and closed end funds.
At the end of 2016 there was more than ten times this amount – $2.6tn.
In the UK, the retail SRI market is now worth about £15bn, up from £12bn less than three years ago, according to data from Triodos Bank, which recently launched a sustainable investment current account.
"It's still a relatively small proportion of the UK investment market, but it is on an upward trend," says Huw Davies, head of Triodos' retail banking unit.
"This now includes both retail customers and institutional investors who are starting to question what they're investing in, and whether it makes more sense to be investing sustainably."
Why such growth?
There are several reasons for this growth – not least the expanding investment universe. Eliminating tobacco, alcohol, arms and gambling from their portfolios no longer goes far enough for many investors.
Modern SRI portfolios are guided by a number of environmental, social and governance (ESG) metrics that take into account themes such as carbon emissions, fraud, employee relations and other ethical values.
“In the US negative screening in ethical investing is by far the biggest strategy, whereas in Europe they're much more focused on ESG,” says Muna Abu-Habsa, director of fund research at Morningstar, the fund rating agency.
But it is not just about ethics – It's also about sustainability: forget annual growth targets of 20%. Many companies have come unstuck trying to maintain such profitability – unstuck either by their failure to achieve and falling foul of subsequent downgrades, or because their efforts to achieve led them down the path of "creative" accounting, or unscrupulous measures.
The realisation is growing among younger investors, that a sustainable, responsibly governed company sits far better in a portfolio than a company run by a tyrant urging his staff to do everything it takes to achieve unsustainable profit goals.
Davies adds: "There has been a shift, and it's something we believe, that companies which put an emphasis on sustainability will be more successful in the longer term."
The demographics are unsurprising. Millennials are becoming ever hungrier for such investments as it is another way of expressing their social, political and environmental values.
"More people are taking an active consideration of how they consume things – what transport they use, what energy and food they buy and where it's coming from,” says Davies.
Nearly two-thirds of 18-34 year olds polled by Triodos said they would like their money to support companies that are making a positive contribution to society.
Furthermore, says Davies, "most of these say they would move their money if they found it was being invested in companies that conflicted with their personal values".
This makes investment an ethical consideration first and a financial decision second. And an increasing number of fund managers are seeing that this is a growing trend.
"There's a general shift in society towards sustainability and Millennials are starting to catch on to that, and it bodes well for the future," says Davies.
For those who want to invest solely in doing good – particularly in the developing world – development banks and other development finance institutions that help build important infrastructure projects can offer the answer.
Without the tools and technology to tend farmland and extract valuable resources from the earth, the wealth of many developing nations remains in the hands of large, and mostly foreign, corporations.
Without roads, rail and communications networks, companies struggle for labour and produce cannot be moved to, and sold on the appropriate markets. And without energy, schools and hospitals cannot be built, and fledgling companies are unable to grow.
Investing in such projects is becoming known as impact investing – for those investors who are willing to sacrifice the highest levels of returns in the knowledge their investment is for social gains.
Philippe Valahu, chief executive of Private Infrastructure Investment Group (PIDG), says: "I see a lot of private financial institutions that have set up impact funds."
He adds: "A percentage of the fund is allocated to develop social projects where investors will sacrifice a portion of their financial returns for ‘feelgood’ returns."
Getting involved in ethical and ESG investing is fairly straightforward, the number of products available has grown rapidly in recent years as both retail and institutional interest in SRI/ESG investing has increased. Mutual funds and ETFs are available, among other products.
These include funds and ETFs that capture opportunities in emerging market infrastructure projects, such as green energy.
Pensions and other Millennial investment habits
But this comes with a caveat.
Millennials are investing responsibly – not just ethically – but also more carefully as they feel they have to make an early contribution to their futures as traditional investments like property are already growing beyond their means.
“Millennials are the next generation of pension savers. They will be the first generation to benefit in full from automatic enrolment but they are also struggling to achieve shorter-term goals such as buying their first home and managing student debt," says Graham Vidler, director of external affairs at Pensions and Lifetime Savings Association (PLSA).
Indeed, research by PLSA shows that half of Millennials (aged between 18-35) are already saving into pensions, while half are saving money, excluding pensions.
Its research also gave some insight into how the generation thinks about investment. Millennials showed strong affinity with the statement "I get more satisfaction out of saving than spending my money", while statements like "I live for today and let tomorrow look after itself", or "I don't see benefits from saving right now", met with strong disagreement.
It seems opinions within the latest generation of young people are changing fast – as they do when you get a little older.
A survey conducted in 2015 showed that just 26% of people under 30 were investing in stocks. But the further this generation moves into its prime earning years, the more these habits will change.
The message to pension funds and investment managers, therefore, needs to be: sharpen up your attitudes to socially responsible investment if you want to catch the Millennials.
Fund rating agency Morningstar found last year that nearly half of all funds marketed in the UK as "socially responsible" were average or worse than conventional funds when it came to ethical investment.
“Asset managers globally are incorporating ESG considerations into their investment processes,” says Abu-Habsa. “Not because it's a statement on their values, but because they think they should form a part of any investment analysis and that they can have a future impact on a company's returns.”
She concludes: “It's become as much about value as it has about values.”
Millennial derivatives trading
Technological innovations have changed the way in which we trade, and no age segment has taken to electronic trading as readily as the Millennials.
TDA told Business Insider earlier this year that the 18-35 demographic accounted for about 40% of its new customers, with more than half their trades coming from mobile devices. Here, they are gravitating towards derivatives, such as CFD trading, where they are speculating on price moves rather than buying stock to own.
With new platforms opening, adding to the mighty number already available, Millennials are choosing to trade CFDs and other derivatives on platforms that give them the greatest access across all media channels.
So, what’s the bottom line – are Millennials better investors than Generation X or the Baby Boomers?
Not really, it would seem. While socially responsible investment is a much more important consideration for Millennial investors than it was in previous generations, having a social conscience doesn’t make you a better investor.
A report earlier this year by TD Ameritrade (TDA) showed that branding appeared just as important – with the top five stocks invested in by Millennials being: Apple, Facebook, Amazon, Tesla and Netflix.
No surprises there – and no dividends either. It seems Millennials could be falling foul of the bandwagon effect, a trading bias that favours herd mentality – or following the current trend.
We just all pray we don’t see another tech bubble go bust.
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