The Millennial generation includes 75 million Americans and they are projected to have a collective inheritance of $41 million from their Baby Boomer parents. At this point, Millennial influence on overall consumer spending and investment decisions is irrefutable. Their rising economic sway along with a keen social conscience is making socially responsible investing (SRI) and impact investing more economically significant and financially consequential.
Sustainable investment choices are expanding and relative performance has improved. The proliferation of passive investment vehicles is reducing overall investment costs, making socially responsible investing more feasible and economical than ever before.
What Drives Millennials
Millennials, who grew up with the internet and came to maturity with social media, are a particularly socially aware and inter-connected generation. That social awareness, coupled with a ready adoption of technology and social platforms and more "progressive" political views than older generations, lends itself to impact investing. This perfect mix of technological knowledge, social media savvy, and progressive views and tastes is being augmented and reinforced by the increased sophistication and availability of more and better investment vehicles and technology. (For related reading, see: Ethical Investing: Socially Responsible Investing.)
Searching for Impact
As Millennials search for deeper meaning and fulfillment in their lives, social returns appear to be becoming as important to them as financial returns. According to a U.S. Trust survey, "Millennials are investing in organizations that prioritize the greater good more than any previous generation." A reported 86% of Millennials who responded to the survey showed interest in SRI/Impact investing. Millennials also tend to possess relatively higher levels of "natural skepticism and modern research skills."
They are distinguishing between pro-social companies and more dubious ones. In the process they are setting specific parameters for what qualifies as socially responsible or impact investments. They are seeking companies actively invested in the "betterment of society and the solution of social problems" and like firms that make their impact on the global community a priority and consider transparency and accountability essential prerequisites.
Environmental, Social and Governance (ESG) is an emerging term defining the kinds of SRI Millennials seem most interested in. They are prioritizing topics like environmental sustainability, education, economic opportunity and access to quality healthcare, nourishing food and potable water, as well as civil rights and social justice. In the process, they are making it clear they want their money habits to have a broad and sweeping impact. The very size of this generation and the enormity of the wealth transfer occurring between Boomers and their Millennial children, make it prudent for investors to stay attuned to these changing tastes and preferences, as the demographic shift becomes more pronounced over time.
A study by the Spectrum Group measuring the scope and influence of impact investing on various generations found that nearly half (49%) of Millennials with a net worth exceeding $1 million identified social responsibility as a major factor in choosing an investment. That compares to 43% for Generation X, 34% for Baby Boomers, and just 27% for seniors. Spectrum also found that "familiarity with SRIs was higher among younger investors, with "more than a quarter of investors under the age of 45 (having) allocated at least 25% of their investments in socially responsible investments." The gulf between generations is stark and points to divergent priorities and concerns from one generation to the next. What's prompting Millennials to make this monumental generational shift toward impact investing? The answer lies in the events that helped shape their attitudes and priorities. (For more, see: The Importance of Millennial Consumers.)
The fallout of the 2008 financial crisis, which fully displayed corporate and personal greed and the negative societal impacts and moral hazard of conspicuous consumption, along with the Great Recession, feature prominently in most Millennials' minds. These events had a dramatic effect on their early adulthood and career years. The related trauma, generational wage gap, and sudden return to austerity after years of conspicuous consumption and gluttonous spending have had deep and far-reaching psychological consequences for Millennials.
This historical context has helped shape attitudinal investing distinctions between Millennials and their Boomer parents, especially where fears and motivations are concerned. Though Boomers were also greatly affected by the 2008 financial crisis, the terrorist attacks on September 11 and their aftermath have had a much more significant impact on their collective psyche.
Many Millennials experienced an existential crisis over what money is and how it should be used. Those graduating college at the peak of the financial crisis were negatively impacted by the apparent lack of greater social responsibility that the crisis exposed. It was a somber awakening, creating the kind of perspective gained only through shared pain and trauma.
Initially, SRI focused more on the exclusion of "sin stocks" (tobacco, military contractors, etc.) than on the inclusion of pro-social companies. Today, socially responsible investing has subtlety evolved to include impact investing, denoting a shift from avoiding stocks based on negative associations, to actively seeking them for the good they do. The transition from socially responsible to impact investing has coincided with a proliferation of crowdfunding initiatives, an increase in the success of the investment strategies themselves, and an end to the stigma of "positive change at the cost of performance." The carryover from crowdfunding and democratized charities to increased social awareness has prompted Millennials to piggyback on existing socially responsible investing options and strategies while infusing their unique views, perspectives and expectations of how SRI should look.
A study by Goldman Sachs found that Millennials are even "more likely to accept a lower return or a higher risk related to an investment if it's in a company that has a positive impact on society and the environment, while less likely to invest in a company that has a negative impact on society and the environment despite potentially large monetary returns." (For related reading, see: How Millennials Invest Differently Than Their Parents.)
The Growth of Sustainable Investing
Where there is sufficient demand, supply is sure to follow and the proliferation of related investment choices has been staggering. A study by the Global Impact Investing Network (GIIN) and J.P. Morgan forecasts that impact investing (using a strict definition) may expand from $9 billion today, to $1 trillion by 2020. According to Morgan Stanley, "U.S. assets managed with sustainable investing criteria have increased more than 135% since 2012 (totaling over $9 trillion today)." And the research by Goldman Sachs claims that, "crowdfunding was projected to have raised more funds than venture capital last year," showing the powerful momentum behind the phenomenon. Spending and consumer habits support this data.
According to a study conducted by the Haas School of Business at Berkeley, California, more than "nine in 10 Millennials would switch brands to one associated with a cause." Branding and marketing are also evolving to meet the changing dynamics in emerging consumer preferences. Given the rise in Millennial wealth and their clear preference for socially responsible brands and impact investing strategies, SRI firms should be increasingly optimistic about both their business and investing environment. The wave of enthusiasm for SRI may contribute to increased market share and profitability.
But this optimism should be tempered with caution. There is precedence for social investment premiums driven by this type of investor behavior. In the 1980s and 1990s, Japanese investors invested in domestic companies, almost as a patriotic and nationalistic duty. Unfortunately, such loyalty to Japanese companies' stock resulted in stratospheric valuations and multiple expansion, which subsequently deflated with the bursting of the bubble.
The Millennial Impact
As Millennials gain in affluence, the impact of their investment dollars may even alter equity valuation norms. Just as a discernable "value premium" on stock returns has existed for decades, a "social (impact) premium" for SRI-related stock prices may start to emerge. Multiples for such stocks may be higher than non-SRI peers as Millennial investment tastes and fund flows slowly begin to dominate the marketplace.
If the old saying, "a rising tide lifts all boats" holds true, then the overall risk/return relationship for SRI investments will likely change markedly over time. Multiple expansion, rising profitability, accelerating earnings growth, and increasing market share, all point to a potential "goldilocks" environment for "impact" companies and related investments. As Millennial preferences grow increasingly supportive of impact investing, more options are emerging that capitalize on this paradigm shift.
It's hard to gauge whether rising Millennial attention to SRI is merely youthful idealism or an enduring generational characteristic to invest for social impact. It's probably a combination of both. But there is little question that this generation's tastes and preferences will continue to drive vast resources toward SRI/impact investing for the foreseeable future. (For related reading, see: Socially Responsible Investing: How Millennials are Driving It.)