RI Quarterly - Handle with care: The empowered millennial 

By Mikael Homanen, PhD Candidate, Faculty of Finance, Cass Business School

Here is the winning essay of a student competition issued by the PRI on the future of RI and millennials. Shortlisted articles were presented by the students at PRI in Person and you can read more about the debate here.  


Millennials are more empowered than previous generations and they know what they want: to invest in the “future”. During the past decade, the growth of forward-looking investments has increased tremendously. Socially-responsible investments are on the rise, green bond markets are expanding, ethical banks are growing and social impact bonds are entering the marketplace. The financial markets are transforming towards a future-oriented system fuelled by many factors, but especially, the younger generations (Morgan Stanley, 2017). This movement is growing and there are further opportunities to be utilised by those who realise and understand its true potential. However, handle with care, for this demand comes with previously unmet challenges for the investment community.

1)   What are the top three challenges and opportunities the investment industry has not focused on adequately (or thought of yet)? 

The recent decade has witnessed a growing attention towards environmental, social and governance (ESG) policies. It began with a focus on traditional companies and the concept of corporate social responsibility (CSR). Later, the investment community got involved with socially-responsible investments (SRI) and now the final developments are in the individual, in other words, the small investor. The small investor’s growing investment demands have gone largely unnoticed and as a result the investment community has missed out on opportunities from three main developments: 1) the individual revolution 2) understanding ESG and 3) communicating ESG.

1) The individual revolution: Individuals are demanding more “bang for their buck” and they do not just mean financial returns anymore. The individual revolution has brought an increased focus on the individual consumer demand and, because of this, traditional corporations started continuously changing, adapting and tailoring their products. Along with these developments, corporations became increasingly accountable to their consumers, especially the millennials (Washington Post, 2011). Now, however, millennials have found a new target: finance. The era of specialised consumer demand has now begun in the financial sector and The Dakota Access Pipeline (DAPL) is an illustrative example of this phenomenon.

The Dakota Access Pipeline protests were grassroots movements that began early in 2016 in reaction to an approved pipeline project in Northern US. The pipeline brought in a lot of controversy from environmental activists and Native Americans, because it was intended to cross both the Missouri and Mississippi Rivers as well as ancient burial grounds. By February 2017, 700,000 people had petitioned against their banks claiming that they were ready to withdraw over $2.3 billion if the banks did not stop financing the pipeline. By that time, thousands had already closed their accounts, removing over $55 million (Common Dreams, 2017).

Since the DAPL incident, banks have taken a series of corrective measures and a few even sold their stakes in the project (ING, 2017). This example demonstrates that financial institutions and their operations are no longer immune to the preferences of their financiers, in other words, the savers. Younger generations are demanding more from their banks, but banks are by far not the only ones to have been affected by these developments. The investment community is changing its product offerings as a reaction to unexpected investor demand for ESG investments and they need to understand that this is merely the beginning. So far, they have mainly witnessed the limited change of hearts found in the traditional investment communities, but as new generations are on their way, they will want their stocks, pensions, insurance and bank accounts all to make a difference. Some have anticipated these changes by offering ethical savings accounts (ING, 2017), green credit cards (Ålandsbanken, 2016), and there is even a new initiative by the UNFCC (United Nations Framework Convention on Climate Change) that offers individuals the chance to offset personal emissions by supporting environmental projects in developing countries. Paying 4.4 to offset 10 tonnes of personal CO2 emissions can be a very attractive offer. Every financial institution needs to ask themselves; could I have attracted more investors if I had been aware of these changes?

2) Understanding ESG: In order for the investment community to start catering to the rising millennial investment demand, they need to understand the fundamental performance drivers of ESG factors.  It is common to hear asset managers saying “we should invest in ESG, because it’s good, everyone is doing it and the clients want it”. Attitudes likes these are a partial explanation to the massive rise in passive ESG investment strategies (Harris, 2017). However, each component of ESG serves a different purpose and knowing this will be crucial in satisfying the millennial investor. Surprisingly, many of the younger investors believe that sustainable investing requires a financial trade-off (Morgan Stanley, 2017), therefore it will be important to rationalise why this is not the case. Energy efficiency can bring production costs down, while better governance policies can create healthier corporate cultures. (Over) Investment in any realm can easily become unprofitable due to poor implementation or inadequate understanding. ESG is not a self-evident factor and an over-valued ESG factor serves no financial purpose. Attention to detail will be important for attracting the new generation of investors as they will be sure to ask: why and how is ESG good for financial returns?

3) Communicating ESG: Millennials are feeling financially empowered and they want real future-oriented investments, not just an ESG label. Once the investment community understands the fundamental values of ESG, they can start communicating it. The individual revolution is creating a growing demand for future-oriented investments and with it, they are requiring transparency and truth. The surge in ESG data providers (MSCI, Sustainalytics, Asset4ESG, etc.) are a reflection of this demand and there are increasingly more platforms (e.g. BankTrack, Tax Justice Network, Forest and Finance) that allow young investors to find out which financial institutions are taking these issues seriously. It is not uncommon to hear from young investors “I was about to invest in their ESG fund, until I later found out what stocks were actually in the portfolio”. This is not a good start since millennials are among the most willing to pay for products and services considered social (Credit Suisse, 2017) and as much as 86% of millennial investor survey respondents said they were interested in sustainable investing (Morgan Stanley, 2017). The younger generations are demanding real change and the ESG tagline for many younger individuals can feel like a false promise. As the demand for information grows, the investment industry will need to learn how to communicate legitimate and realistic ESG investment policies to younger investors. If they do not, they run the risks of not attracting new young clients or potentially losing existing ones. 

2)   How and where does current investment practice need to change to overcome these “barriers” and step up? 

Take it seriously: To overcome current challenges and seize future opportunities, the investment community needs to take ESG strategies with all seriousness. Young investors and depositors are increasingly sensitive to controversial news from financial institutions and the DAPL example is no outlier. Panama Leaks created real reputational damage to the banking sector, and non-profit organisations are increasingly expanding their focus towards the larger financial community including pension funds, insurance companies and sovereign wealth funds (WWF, 2017). As information becomes more accessible and investor demand for “real” future investments increase, the investment community needs to understand that these efforts must be taken with vigour and determination. All of these recent developments are steering the millennial investor closer to the institutions aligned with their interests. Socially-responsible investing is not a side show anymore and those who tackle it without professional care will be likely to harm themselves in the long term.

3)   How to design and tailor RI criteria 

Provide more reliable information: Responsible investment criteria are becoming more demanding as the traditional “check-box” mentality is regarded ill-fitting for understanding the real scope of ESG fundamentals. Simple ESG scores are not enough anymore as young investors want qualitative assessments for each component. If an average ESG score is 80%, but individual components range from 50%-95%, young investors will want to know about it. Asset managers must choose the ESG criteria that are relevant to the industries in question and communicate this directly to younger investors. Therefore, providing more reliable ESG information is the next step towards meeting the new millennial investment demand. Few asset managers have already identified this and are developing investment products that can directly communicate fund/investment ESG ratings to their clients' phones. Other financial players, such as social banks, have relied on this source of “know where your money goes” communication for decades (Triodos, 2017). Others are following in their footsteps, but more remains to be done. 

4)   How can responsible investing be delivered?

Be honest: Responsible investment cannot be implemented if it is not delivered honestly. If you are appealing to clients by their willingness to help and make the world a better place, you are taking advantage of the same set of inherent motivations that charitable institutions use to attract donations. This is not wrong in any way, but this makes trust a much larger factor in the investment transaction. Even the most well-intended and successful institutions, including micro-financing institutions such as KIVA, are not immune to criticism when lending or investment standards are deemed controversial (SF Weekly, 2008). In fact, they might be more likely to be criticised as expectations on them are set on a higher moral standard. This would change for the investment community as well. If young investors are to trust perceivable ESG ambitions, they must be genuine. Young investors are monitoring ESG performance at an increasing pace and even the most well-intended action can lose its credibility once people suspect ulterior motives.

The investment community is no longer drawing only on people’s yearning for higher returns, hence they need to be careful with the promises and strategies they choose. Maximising the returns for investment and social impact is a completely different economic equation (Gneezy & Rustichini, 2000) and experience is not on our side. As we continue this path of combining two very different worlds of motivation, we need to handle our empowered millennial with care. 

REFERENCES

Carlström, V. (2016) Finnish bank launches credit card that lets users track their carbon footprint. Business Insider - http://nordic.businessinsider.com/finnish-bank-launches-credit-card-that-tracks-that-lets-the-users-track-their-carbon-footprint-2016-6/

Common Dreams (2017) Over 700,000 People Demand Banks Stop Financing the Dakota Access Pipeline - https://www.commondreams.org/newswire/2017/02/03/over-700000-people-demand-banks-stop-financing-dakota-access-pipeline#

Credit Suisse (2017) Millennials Drive Sustainability - https://www.credit-suisse.com/microsites/next/en/entrepreneurism/articles/millennials-drive-sustainability.html

Harris, D. (2017) The London Stock Exchange’s David Harris on how HLEG can support current investment trends. Responsible Investor - https://www.responsible-investor.com/home/article/the_london_stock_exchanges_david_harris_on_how_hleg_can_support_current_inv/

ING (2017) ING introduces savings accounts for UNICEF - https://www.ing.com/Newsroom/All-news/Features/Feature/ING-introduces-savings-account-for-UNICEF.htm

ING (2017) ING and the Dakota Access Pipeline - https://www.ing.com/ing-in-society/sustainability/ing-and-the-dakota-access-pipeline.htm

Morgan Stanley (2017) Sustainable Signals – New Data from the Individual Investor. Institute for Sustainable Investing - http://www.morganstanley.com/pub/content/dam/msdotcom/ideas/sustainable-signals/pdf/Sustainable_Signals_Whitepaper.pdf

Nunn, Michelle (2011) Millennials to business: Social responsibility isn’t optional. Washington Post - https://www.washingtonpost.com/national/on-innovations/millennials-to-business-social-responsibility-isnt-optional/2011/12/16/gIQA178D7O_story.html?utm_term=.56d6cc1a6f3b

Smiley, Lauren (2008) Kiva’s Microloans Underwriting Cockfighting in Peru. SF Weekly - https://archives.sfweekly.com/sanfrancisco/kivas-microloans-underwriting-cockfighting-in-peru/Content?oid=2166521

Triodos Bank (2017) Know where your money goes - https://www.triodos.com/en/about-triodos-bank/know-where-your-money-goes/

United Nations Framework Convention on Climate Change (2017) Climate Neutral Now - https://offset.climateneutralnow.org/

Gneezy, U., & Rustichini, A. (2000). Pay enough or don't pay at all. The Quarterly Journal of Economics115(3), 791-810.

World Wildlife Foundation (2017) Biggest EU investors are partly aligned with Paris Agreement but more efforts needed - http://www.wwf.eu/?303711/Biggest-EU-investors-are-partly-aligned-with-Paris-Agreement-but-more-efforts-needed