Sustainable Investments: A Guide for Young Generations - Article 1: Millennials and Gen Z's

Young Generations

Young generations have always had a strong impact in modeling societies, and the ones that represent this group nowadays, more specifically Millennials and Gen Z's, make no exception, especially while being the first two digital native generations in this technological and rapid-changing reality. As of 2020, they represented approximately 30% of the global population, more than any other adult cohort, clearly marking their importance on the future, but also the present of our world.

Many studies and articles are published about them, especially regarding their lifestyle choices, usually related to sustainability. Through their preferences and consumption patterns, they make purchases in companies that share the same beliefs as they do, setting up new standards across industries, and in some way, forcing other companies to comply to their rules, while encouraging and educating other generations regarding social and environmental causes. A recent survey from Deloitte which was made before and then repeated after the Covid-19 pandemic hit, found out that young generations had increased the use of public transportation, had decreased the consumption of single-use plastic and went also as far as saying that 62% of them considered the environment when deciding on how many children they want to have. They ranked environmental issues as their primary concern of their life: other issues such as healthcare/disease prevention, unemployment, and income inequality ranked lower, a surprising fact since the question was repeated after the global pandemic hit, and the results remained the same.

Another important fact regarding millennials, is that this demographic group is going through an important wealth transfer: “The Great Wealth Transfer”, as it is referred to by numerous professionals, is the process of transferring wealth through inheritance from Baby Boomers (people born between 1946-1965) to younger generations. In terms of amounts to be transferred, there are differences between reports, but the majority of them rounds up the sum to 30 trillion$ to be transferred in the following few decades. By the year 2030, when the last baby boomers turn 65 years old and reach retirement age, most of this transfer would have already happened. The transfer will put in millennials’ possession five times as much wealth as they have today, making them one of the wealthiest and most powerful generations that have ever lived. Apart from the great wealth transfer that is expecting them, until now millennials and gen Z’s have experienced a lot of financial struggles. Entering the workforce during the financial crisis of 2008, they have been less fortunate than previous generations. In terms of salaries, they earn 20% less than their parents, their rate of home ownership is much lower than that of baby boomers, since their low income forces them to rent instead of being able to purchase properties, but they are fighting back by cutting their costs in other places by being practitioners of the “sharing economy”, using digital solutions and mobile applications for their transportation, accommodation, consumption, and many other needs. This way of life, partnering with their high-education levels and combined also with their financial wariness (they have experienced, although not directly, at least three financial crises during 2000-2021), have made them accumulate some considerable amounts of savings. However, young generations cannot just put their savings into a bank account with the low interest rates that have characterized the economy in the last decades and expect to reach financial freedom. Long gone are the days when you would experience some 15% returns by just putting your money into a bank and watch them grow substantially. This phenomenon has made young generations to direct their savings elsewhere, specifically in the investment markets. Internet, web content, and a lot of web-based broker companies have facilitated this process tremendously, giving access to the markets in a matter of minutes for everyone that is interested to invest, and cutting cost to the point that an investor can get in or out of a trade without having to pay a single penny. As a result, inflows into the investment markets have seen an astonishing growth. In financial terms, equity funds have attracted more than half a trillion dollars (562 B$) during the first 5 months of 2021, exceeding inflows recorded over the previous 12 years (452 B$).

Views on Sustainable Investments

Despite their lifestyle and their large presence on the financial markets, millennials and gen Zs do not take sustainability into account when picking investment opportunities - this was one of the findings that was discovered when I polled more than 100 youngsters, a result that was similar also on other professional studies. Only 8% of the sample had invested according to sustainable strategies. But why is this the case? Before diving deeper into the study and the findings, it is important to give a simple definition of what sustainable investing actually means:

Sustainable investing is the process of incorporating environmental, social, and governance (ESG) factors into investment decisions: individuals that invest sustainably choose to support companies, investment funds and organizations with the purpose of generating measurable impact, both financial and environmental/social. Investing sustainably means directing capital to companies that devote themselves to ESG matters, ultimately promoting positive societal and environmental impact. On the same time, sustainable investing discourages investments in companies that find themselves harmful on the expense of the society or the environment. 

Aligned with their lifestyles and values, sustainable investing seems very appealing to these generations. Sixty-six percent (66%) of the individuals polled stated that they are interested to invest in sustainable assets now or in the future; 33% of them said that they are not sure, while only 1% gave a plain negative answer. Similar numbers came out also according to a CFA Institute report, which showed that 75% of millennials were interested in the topic as of 2020. Respondents of a Morgan Stanley survey were even more optimistic: 95% of the millennials polled stated that they are interested in sustainable assets. They are convinced that their investments can have an impact on the environment and the society, therefore are more likely to take investment decisions based on issues that stand important to them, since, in their opinion, a valuable investment goes beyond financial return and considers positive impact as well.

So, let's return to the previous question. If millennials and gen Z's are so interested in investing sustainably, why aren't they investing according to this mindset? I found out many reasons in my study, with the main one being that the polled individuals were not educated enough regarding sustainable investments. This was followed by the lack of free sustainability data on the market and the lack of clarity regarding the sustainable investing world. In the fourth place is ranked the reason that seems to appear in every report concerning the topic, that sustainable assets perform worse than their comparable peers. An interesting discovery was that 9% of the polled individuals stated that they weren’t aware of the existence of this particular investing branch, pointing out that financial education towards young generations must be a priority in the investment markets.

Since the above-mentioned issues were found and cited also in other reports and studies done by professionals, individuals were asked if they would be more prone to invest in case reliable data and education sources would be easier to access and navigate. The results were identically the same, with 80% agreeing, 19% being neutral, and only 1% believing that more education and reliable data would not increase their appetite concerning sustainable investments. Financial underperformance is also listed as one of the most important reasons in many studies, with Morgan Stanley stating that the financial trade-off represents the most pressing hurdle to mainstream the sustainable investing movement. They found out that millennials strongly agreeing with the trade-off increased from 8% in 2015 to 18% in 2017, with more than 63% of all the polled individuals generally agreeing that pursuing sustainability will lower the investment returns. Since financial performance is usually measured in terms of risk and return, individuals were asked for their opinion regarding these two indicators in case of a sustainable investment: as for the returns, 42% agree that these types of investments can result in lower returns, with 32% remaining neutral in their thought, and 26% not believing in the trade-off; the results were very similar also in terms of risk perception.

A Clear Message Received

The findings presented in the previous section, consistent with the results of many studies and reports, give a clear message regarding young generations and their knowledge in respect to the sustainable investing universe. Millennials and Generation Z’s see sustainable investments as perfectly aligned with their lifestyle, habits, and values. They want to support the companies that promote ethical behavior in terms of consumption but also financially, to the point that 17% of them are prone to accept lower returns compared to traditional investments only to do good to the society. They want to do good, they know they can do good, but they are afraid to take these important decisions by themselves since they are not educated enough for the matter. Hence, efforts to instruct them on how to move with more clarity in this universe are fundamental and should be a priority in order to direct their wealth towards sustainable companies, funds, and projects, contributing to the society and the environment as a whole.

References:

The Deloitte Global Millennial Survey 2020.” Deloitte, 2020

Adinarayan, Thyagaraju, and Sujata Rao. “Melt up? More Money Poured into Stocks in Past 5 Months than Last 12 Years.” Reuters, 9 Apr. 2021

A LOOK AT WEALTH 2019, MILLENNIAL MILLIONAIRES. CBGL, 2019

Cheng, Marguerita. 8 Characteristics Of Millennials That Support Sustainable Development Goals (SDGs). Forbes, 30 June 2021

MILLENNIAL REPORT, WINTER 2020. BANK OF AMERICA, Through Better Money Habits®, 2020 

Sustainable Investing: The Millennial Investor. EY, © 2017 Ernst & Young LLP, 2017

Future of Sustainability in Investment Management: From Ideas to Reality. CFA Institute, 2020

Swipe to Invest: The Story behind Millennials and ESG Investing. MSCI, MSCI ESG Research LLC, Mar. 2020

2016 Millennials, Women, and the Future of Responsible Investing Report. Responsible Investment Association, Apr. 2016

Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction and Choice. MORGAN STANLEY INSTITUTE FOR SUSTAINABLE INVESTING, © 2019 Morgan Stanley & Co. LLC and Morgan Stanley Smith Barney LLC, 2019