Millennials and Gen Z are poised to reshape the business world through a focus on environmental, social and corporate governance, which comprise of three central factors investors use to determine growth and risks of companies. As young investors work to align their money with their values, ESG stands to have an increasingly important role in the world of finance.
The environmental factor revolves around sustainability. The social factor concerns itself with the consideration of companies’ customers and employees.
The governance factor screens for matters such as corporate corruption, compensation structure and auditing.
Although there is not a standardized measurement of ESG, Sustainalytics’s popular ESG Risk Rating metric measures the degree to which ESG issues put a company’s enterprise value at risk. A low score on a scale of 1-100 indicates less ESG risk.
PricewaterhouseCoopers’ 2020 Annual Corporate Directors Survey revealed a stark crisis sitting at the top of the corporate ladder. Only 24% of survey respondents were women, out of which 34% of board members said diversity is important and 38% think ESG is a financial consideration for their firm.
But millennials have proven to be more socially and environmentally aware than their parents.
From calling out Wells Fargo’s social discrimination to investing in renewable energy, millennials are increasingly allocating their assets to investments that not only might generate a financial return but also align with their belief in the importance of social justice causes.
A 2019 Morgan Stanley Institute for Sustainable Investing Report surveyed active investors and found 95% of millennials are interested in sustainable investing and 67% take part in at least one sustainable investment.
Furthermore, millennials are twice as likely as the overall investor population to invest in companies targeting social or environmental goals. And 90% of them say they want sustainable investing as an option in their 401(k) plans.
Despite the boom in sustainability investing, some investors still think ESG investing may compromise investment return. But these concerns are also opportunities for growth.
Millennial investors, despite taking an outsized interest in sustainability, tend to agree with the theory that ESG is an opportunity cost of financial gain, that there is a tradeoff between investment return and sustainability.
Morgan Stanley’s analysis titled “Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds” seems to prove this idea wrong.
This analysis found sustainable funds to provide an equal investment return compared to that of traditional funds. And as climate change has become the number one global issue, progressive companies that prioritize sustainability will have a competitive advantage over those who don’t.
By choosing to invest with an ESG conscience, millennials will drive demand for public equities that benefit the earth and society, shifting the capitalist paradigm into a greener and more responsible place.
As the great wealth transfer from baby boomers to the younger generation approaches, the role of the nearly $65 trillion expected to be transferred means ESG will become an even more significant force in the corporate and economic world.