Millennials and Gen Z drive demand for more ESG investment choices

Environmental, social and governance principles continue to gain interest from corporations, governments, fund managers and, more importantly, younger investors. According to a Pew Research Center survey, both Millennials and Generation Z are more active online and offline in regards to social and environmental issues compared to their older peers.

Changes in the way asset and fund managers are constructing investment opportunities have now taken a different turn, enabling more financial professionals to seek ESG-focused investment vehicles that are in line with younger generations’ social activism goals.

During the last several years, there has been a strong sense of encouragement among investors, both old and new, to build more socially conscious portfolios. This collaboration enables companies and government institutions to gain access to the necessary financial resources to build more robust and innovative ESG-focused policies.

As the financial landscape continues to change, and more investors are seeking to introduce ESG assets into their long-term investment strategy, an important question on everyone’s mind remains what challenges and opportunities does ESG investing pose in capital markets, and how can investors navigate these circumstances more effectively.

The hidden assumptions of ESG investing

When we begin to take a few steps back and look at the bigger picture of how investment choices can make a more favorable impact on the future of the planet, environment and people, there are a few hit-and-miss questions that remain unanswered.

One of them, and perhaps the biggest question fund managers and seasoned shareholders are wondering about, is how companies will adapt to the changing market landscape to address specific issues younger investors care about.

Some may argue for the fact that not all investors share a homogenous viewpoint considering ESG-focused products, leaving little to change in the greater scheme of things. Others share that some fund managers will be required to adapt and change in accordance with market pressure and more young people stepping onto the market in the coming years.

In a similar vein, some wonder what power fund managers have to help change the direction of companies, and how they’re using their voting power to make a change for the better. Would fund managers be able to address both investor and corporate needs simultaneously, while also considering the future potential of investment returns on products that merely address conscious investment causes?

The disparity is perhaps more clear once we begin to break down the various intricacies that stand between the investor, fund manager, and corporate entities.

While one side, investors, may understand some environmental and social issues, as they witness them firsthand, a board of directors of a company that has some ESG policies may be more abstract due to the individuality of each person and their viewpoint of these principles.

What’s more, not many investors are completely willing to lose on their long-term returns, even if younger generations might have a longer time horizon compared to older generations. Although some investors might be willing to give ESG investments a shot, fund managers might be in a more precarious position having to make these efforts become a reality.

As you begin to factor in one thing after the other, the equation becomes increasingly complex and much harder to solve in terms of the long-term value of ESG products.

On one hand, there’s some significance in terms of ESG products, and perhaps those shareholders interested in these sorts of investments. On the other hand, there could be minimal change that occurs over the long-term horizon, leaving investors to sit with continuous losses without seeing any real change or improvements taking place.

The reality would be that fund managers, along with seasoned investors and company directors, would need to consider how to create a balance. What are their overarching goals? Would this perhaps be a combination of things or rather one set of core values that they would carry throughout the coming years?

There is still much that needs to be resolved in terms of environmental, social, and corporate governance investing. It will take more than just a handful of funds and investment products to provide possible solutions. Read more: ‘People who really know what ESG data is, know it isn’t political.’

The bottom line

Investing with the planet, the environment and society in mind can become seemingly ambiguous over the long term, but there is a possibility for change and adoption of principles that can clearly carry out the core values of young investors.

However, as one begins to weigh these against traditional assets and funds, there’s still a lot of room for improvement, both financially and logically. A better understanding of how fund managers can direct their influence and present actual changes for companies to later develop key ESG principles would require immense resources. Yet, the opportunity isn’t completely lost.

Compared to older generations, there’s a clear disparity between what Millennials and Gen Z value and what they want in their portfolios. The generational lines are steadily changing, and perhaps in favor of the planet and social inequality.

It’s only a matter of time, and perhaps the necessary supervision of fund managers and seasoned shareholders can lead to actionable change and help direct coming-of-age investors towards a future of sustainable growth and equitable opportunities in the stock market.