Climate worries are spurring younger investors to rethink their portfolios

Last year was marked by a series of unprecedented weather patterns taking place across the world, causing irreversible damage to natural ecosystems and costing billions in damage. For decades, experts have exclaimed that accelerated human activity is directly impacting atmospheric temperatures, leading to more extreme weather outbreaks now becoming a more frequent occurrence.

Climate change, or more importantly, rising surface temperature isn’t a myth anymore. According to the World Meteorological Organization, last year was the hottest year on record, with the global mean near-surface temperature being around 1.40 degrees Celsius higher than before the industrial revolution. Based on MTO’s data, 2023 is expected to be the hottest year in over 174 years.

Warmer, dryer, and longer summer seasons aren’t the only thing humans are now faced with. Heavy rainfall in East Africa, more specifically in Somalia, Ethiopia, and Kenya during October and November caused devastating flooding. In August last year, Canada experienced their worst wildfire on record, burning approximately 13.4 million hectares of land, and sending thick clouds of smoke across parts of North America.

More than climate: an ESG investing mindset

While environmental concerns may perhaps sit at the back of the mind for some older and more seasoned investors, younger generations are embracing the idea of creating more visible change through their investing strategies. Some cohorts of young investors, particularly Millennials (born 1982 to 1996) are perhaps playing the most significant role when it comes to ESG – environmental, social, and governance-focused investing.

Read more: Millennials and Gen Z drive demand for more ESG investment choices.

In one report by Morningstar, data showed that Millennial investors poured a robust $69.2 billion into sustainable funds in 2021, and more than $51.1 billion in the year before. This is an overall significant improvement compared to the $5 billion invested in ESG-focused funds back in 2015. Other research by Morgan Stanely found that 90% of Millennials surveyed were interested in pursuing sustainable investments, compared to more traditional strategies.

However, Millennials aren’t the only ones looking to change their investment habits for the betterment of the planet and environment. In fact, Generation Z (born between 1997 to 2012) are also among those now focusing more on sustainable investment efforts, looking to support companies that have existing ESG efforts and pour their cash into funds that align with their personal values. A survey by U.S. Bank found that nearly two-thirds of Gen Z investors were more open to allocating their portfolios toward causes they care about.

While the spectrum of these causes may be broad, anything from environmental to social justice and corporate governance, there’s a clear contrast between what young and aspiring investors care more about compared to older generations.

Compared to their younger cohorts, 16% of Gen X and 2% of Baby Boomers have said that they exclusively considered ESG factors when making trades or funding their portfolios. In the case of Gen Zers, nearly one-third of them are making investment decisions based on ESG factors, while only 19% of Millennials are said to be doing the same.

What’s more, in the same U.S. Bank survey, only 45% of Gen X and 30% of Boomers said they were open to taking on more ESG products in their portfolios.

The future of investing: Equitable and sustainable

An investigation by Bloomberg Media found that roughly 71 percent of global business leaders now believe that future investment decisions will be largely driven by ESG principles and that, over time, fewer investment decisions will be made without considering ESG policies to some extent.

More than this, younger generations focused on the potential of environmental, social, and governance investing could help to bring more innovative developments that could remove barriers for investors, increase the availability of ESG assets and funds, and help to reshape the disruptive change ESG-related investing can bring to social and political circumstances.

The larger impact these investments may have on sectors such as financial services, government, technology, health care, and environmental sustainability could help fast-track sector-specific development and help to better foster collaboration between industry and ESG principles.

As younger generations are stepping into the financial markets, making a difference and leaving behind a legacy are becoming part of investment strategies. That will drive a wave of change among companies, fund managers and financial institutions.

Instead of being focused on short-term gains, younger investors are looking towards driving change for the greater good, parking their money in investments that promote equitable and sustainable development and the uplifting of individuals. They are using their savings to become active participants in creating a more balanced and progressive global economy.