Millennials are changing the nature of finance and how it works (or doesn’t), corporations, the investment and pensions industry, and investment itself.
Financial models and products must change to meet the needs and expectations of millennials, as well as the accompanying challenges and opportunities of the future. The PRI focused on this by issuing an essay competition for Masters and PhD students under the age of 35.
The essays address the following questions:
- What are the top three challenges and opportunities the investment industry has not focused on adequately (or thought of yet)?
- How and where does current investment practice need to change to overcome these barriers and step up?
- How to design and tailor RI criteria?
- How can responsible investing be delivered?
Two essays were shortlisted and the students presented their vision of the future to a panel composed of an asset owner, an investment manager and an investment consultant. The panel selected the winner based on factors including: likelihood, innovation and strength of impact. This article summarises the discussion and reveals the winning essay.
- Laila Dib, MSc student, Maastricht University, Responsible Investment in Millennial Times
- Mikael Homanen, PhD student, City University, Handle with Care: The Empowered Millennial
- Dr Michael Viehs, Manager, Engagement, Hermes EOS and PRI Academic Network Advisory Committee member (moderator)
- Andreas Hallermeier, Head of Sustainability, Bayerische Versorgungskammer (BVK)
- Amanda Young, Head of Responsible Investment, Standard Life Investments
- Daniel Ingram, Vice-President of Responsible Investment Research and Consulting, Wilshire Associates
Millennials are attracting interest and apprehension in equal measure. What does the future hold and how can the investment industry address key challenges? Dib positioned her argument through the filter of gender, arguing that RI products for women or those that have a robust gender-specific component are almost non-existent. In a market where over half of investors are women, Dib underlined the short-sighted nature of this situation.
Homanen viewed the RI movement of the last 10 years as an “individual revolution,” arguing that millennials are “very reactive when it comes to ESG factors. They want to contribute to the future that they want for themselves.” He highlighted parallels between charities and ESG, saying the approaches should be similar with millennials seeking “real ESG products, not just a label.”
“ESG can feel like a false promise for a lot of young investors.”
On the first issue – the challenges and opportunities of RI – the pair were asked to debate, Dib quickly flagged up the issue of generational differences. Millennials “live entirely different lifestyles from their parents, often holding different sets of beliefs.” The difference she highlighted as being of greatest relevance was the preference for almost any service to be available to them online.
Millennials “live entirely different lifestyles from their parents, often holding different sets of beliefs.”
Disrupters that will drive investment: The role of technology and communication
This issue of technology resonated during question time. Young posited that “disruption is part of the millennial mantra.” She asked the pair what they anticipate will be the biggest disrupter that will drive investment in the next 10 years.
Dib pointed to technology, which she views as a blessing and a curse. Although technology won’t solve the issue of how to get people to invest sustainably, it is necessary for delivery and to increase access, she said, arguing that you “need to make it really simple.” Homanen suggested there was a communication issue when “framing ESG products.” He quoted Simon Howard, chief executive at UKSIF, who recently argued that any message or communication should be framed in 18 characters for millennials, which isn’t possible for ESG issues. Homanen argued the situation will reach a point where ESG can be standardised, and that this will provide the necessary tipping point for change about how we communicate about ESG and ESG products.
Homanen also focused on the savvy and demanding nature of millennials, saying individuals “are demanding more ‘bang for their buck’ and they do not just mean financial returns anymore.” He argued that the investment community is missing out on opportunities from three main developments, namely what he called the “individual revolution”, as well as understanding ESG and communicating ESG. He warned that while the investment community is changing its products as a reaction to unexpected investor demand for ESG investments, this is only the beginning.
The pair went on to explain the second part of their respective papers – namely how, in the face of these challenges, the investment industry needs to step up. Trust and sincerity were their key messages. Dib stressed millennials’ deep distrust of traditional financial institutions, which in her view extended to “traditional companies attempting to ride the green wave.” She also argued that many millennials found investing confusing. Citing a Harris Poll from 2016, Dib highlighted that 69% of millennials surveyed, and 76% of female millennials, held this view. Homanen’s plea to the investment community is to take issues seriously. He argued that millennials are “increasingly sensitive” to controversial news from financial institutions, making those institutions that are aligned with their interests a lot more attractive. Both these arguments point to the need to simplify products and host them on different platforms.
Trust was a buzzword during question time. Dib focused her argument on the need to “inspire trust and make it simpler and cleaner to invest” because, as she put it, “millennials are distrustful; they grew up with the financial crisis.” A different side to this issue emerged when Ingram questioned why it is that millennials are willing to trust fintech platforms over traditional platforms.
“Millennials are distrustful; they grew up with the financial crisis.”
Dib argued that it is a matter of blind trust, and that much of it is rooted in the fact that things have not yet gone wrong with these platforms. Echoing this, Homanen argued that those who have experienced financial crises are more risk averse, and that “millennials just haven’t had these shocks yet.”
How to design and tailor RI criteria
For Dib, the responsibility to invest was shared. She argued that the investment community needed to facilitate investment, which, in turn, would leave no excuse for millennials not to be able to invest in line with their values. To facilitate investment, Dib suggested providing greater resources for those who invest to learn basic economics and finance. She also reiterated the issue of placing products online with the argument that investment companies shouldn’t expect millennials to form relationships with banks and other institutions in the way that previous generations have. Finally, Dib argued the investment community must offer a range of products, providing enough of them and in a customisable form, to meet the demands of a large, but not homogenous marketplace.
Homanen stressed that more reliable information is needed. For him, millennials reject what he described as the “traditional ‘check-box’ mentality” in favour of qualitative assessments. Asset managers should “choose the ESG criteria relevant to the industries in question and communicate this directly with younger investors,” he said.
Highlighting an important point on this issue, Hallermeier asked how you combine ESG if you have a generation that didn’t want to invest in complex investments? Dib again suggested that this comes down to trust, saying: “People need to believe [in] what you are doing and where you put your money is good.”
How to deliver responsible investing
These sentiments extended to the delivery of RI. Homanen encapsulated this in a single word, honesty. For him, motivation to invest mirrors how charities attract donations, arguing trust and honest delivery should be more prominent factors in the transaction. Similarly, Dib noted that if investment companies want to inspire trust and attract millennials, they need to be transparent in how they deliver their products. Specifically, the design of RI should move in the direction of the Sustainability Accounting Standards Board’s Materiality Map. Beyond this, she argued the need for a basic global standard for tracking and reporting to simplify investor access to information.
During question time, the students were also asked to outline their thoughts on how to communicate to millennials about what the investment industry does, as financial awareness and education is crucial to engage. The pair had very different answers to this. For Homanen, it is important to deliver a simple message that underlines how a company is doing good with investors’ money before going into greater detail as a next step. Meanwhile, Dib felt that messages should change to reflect location and culture, arguing that in her native country, Brazil, the word “sustainability” was well understood and has a significant, positive meaning. Elsewhere, it could have very different connotations or be less clearly defined.
At the end of the session in what was a very close contest, the panellists and moderator came down to an even split and the audience vote decided the winner. With 53% of the vote, Mikael Homenen was announced the winner, and it is with great pleasure that we feature his paper, Handle with care: the empowered millennial, in full.
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PRI RI Quarterly: Highlights from the Academic Network Conference and PRI in Person 2017
RI Quarterly vol. 12: Highlights from the Academic Network Conference and PRI in Person 2017
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How and where will millennials invest?