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Will Millennials continue to push forward the ESG juggernaut?

Synopsis: The demographic forces and changes in customer preferences are often the most powerful driving force for the adoption of new trends. This applies across industries and sectors: be it fashion, culture, products, social media, or asset management. The reasons could range from awareness to a sense of responsibility or the motivation to do the right thing with their money, provided the new generation is conscious of their role in addressing urgent and pressing challenges of the world. Are millennials doing the same with where they are investing and is this the reason, asset managers have started paying more attention to sustainability and ESG issues? The assets under management in global sustainable funds grew by 12% globally to $2.24 trillion as of June 2021. With such massive inflows, asset managers are getting in on the game and rebranding conventional products into sustainable offerings. Add to it the fact that millennials are set to inherit approximately $30 trillion over the next few decades and the picture gets more interesting. That’s because millennials and Gen Z’s are the biggest supporters of ethical investing. For them, value-based investing matters much more than just a good, solid alpha. While it is commendable, millennial investors must remain vigilant of companies involving in greenwashing. For ESG to be a successful endeavor, the stakeholders must fire on all cylinders and make sure that no stone’s left unturned.

ESG and the change in consumer preferences

Broadly speaking, over the last couple of years, there have been two trends that have immensely contributed to the increasing popularity of ‘sustainability in products and services’: a) the evolving consumer preferences, and, b) the Covid-19 pandemic. However, there are quantitative studies as well which prove this point and support the qualitative assessment on this.

There was an IBM study in April of this year that was related to the impact of the coronavirus pandemic on consumer preferences. It was titled “COVID-19 Pandemic Impacted 9 in 10 Surveyed Consumers’ Views on Sustainability”. This was based on a significantly large sample size and it indicated that COVID-19 has elevated consumers’ focus on sustainability and willingness to bear the costs for a sustainable future.

According to an IBM Institute for Business Value (IBV) survey of over 14,000 consumers in nine countries, 90% of these consumers reported that the COVID-19 pandemic affected their views on environmental sustainability, and COVID-19 was the top factor cited in influencing their view – more than others such as widespread wildfires, disasters due to weather events and news coverage.

For example, many surveyed employees were willing to accept a lower salary to work at a sustainability-conscious employer. According to the survey, 71 percent of employees and employment seekers said that for them, environmentally sustainable companies are much more attractive employers. There are many interesting things in this survey:

  1. Forty-eight percent of all personal investors surveyed already take environmental sustainability into account in their investment portfolios and a further fifth (21 percent) surveyed say they are likely to do so in the future.
  2. 59 percent of personal investors surveyed expect to buy or sell holdings in the next year based on environmental sustainability factors. Many surveyed shoppers and travelers are willing to pay more for environmental sustainability.
  3. Despite the COVID-19 pandemic’s financial impact on many individuals, 54 percent of consumers surveyed are willing to pay a premium for brands that are sustainable and/or environmentally responsible.

The survey also revealed differences in consumer opinion across geographies, with Americans surveyed reporting the least concern about sustainability topics. For example, only 51 percent of US consumers surveyed said addressing climate change was very or extremely important to them, compared to 73 percent of respondents from all other countries.

These are amazing insights and if this change in consumer preferences persists, it could be the biggest driving force for sustainable finance and ESG investing in the coming years. These are all very encouraging data points for the future of ESG and Sustainability. How these things will get ingrained in consumer behavior, the most sustainable catalyst for change?

Millennial Jump into the Markets

Millennials are classified as those born between 1980 and 1996. So as of today, these are the people in the age group of 25-40. With financial independence and the digital explosion, millennials have pushed “consumerism” to the forefront. The GameStop phenomenon, witnessed earlier in the year, was an announcement of the arrival of the millennial investor. Hustling in a Reddit group to take on the almighty Wall Street short-sellers, these retail investors showed the power of the individual against the organization.

Figure 1: MSCI ACWI IMI Millennials vs MSCI ACWI IMI

Source: MSCI

The MSCI ACWI IMI Millennials Index is based on the MSCI ACWI IMI Index, the parent index, and includes large, mid, and small-cap securities across 23 Developed Markets (DM) and 27 Emerging Markets (EM). The index aims to represent the performance of companies that are expected to derive significant revenues from industries that target the preferences of the “millennial” generation.

What are the stocks the new generation is investing in?

Recently, DailyFX conducted a study to find out the companies that millennial and GenZ (those born between 1997 and 2012) investors were more interested in buying. It tracked user searches for stocks on online brokerage Robinhood for the 12 months ending in April. Unsurprisingly Apple and Tesla were the top two stocks on the list. Considering the youth appeal of Apple’s products and the mass appeal of Elon Musk, this doesn’t come as a surprise.

Apart from tech and e-commerce giants Microsoft and Amazon, the list was populated by the likes of Pfizer, Nio (Shanghai-based electric car brand), Disney, etc. Considering the momentum behind the legalization of cannabis in the US, young investors are steering towards companies such as Aurora Cannabis, Aphria, and Canopy Growth. Touted as stocks of the future, these companies also made the list.
It is normal to begin with stocks that have a familiarity and then with proper research and information put money into other stocks that show promise.

ESG and the Millennial Investor

Millennials and Gen Z have come of age at a time of extraordinary technological advances and against the backdrop of a financial crisis (2008) and an unprecedented pandemic (covid-19). And not to forget the raging wildfires of Australia, California, Amazon, and as recent as the Mediterranean. The constant natural disasters in the form of cyclones, hurricanes, and typhoons that have increased in magnitude due to global warming brought about by a rapid economic splurge add to the narration as well. According to the “Deloitte Global 2021 Millennial and Gen Z survey”, the no. 1 concern for Gen Z is Climate change/environment protection, followed by unemployment and health care/disease prevention.

In terms of the environment, people today are increasingly getting worried and affected by the drastic weather phenomenon. Be it the winter storm that plunged large swaths of Texas into subfreezing temperatures and overwhelmed the state’s electricity infrastructure or the heatwave sweeping across the Mediterranean, the effects of climate change are evident. The recent IPCC report that the planet will warm by 1.5° Celsius in the next two decades without drastic moves to eliminate greenhouse gas pollution calls for unprecedented and immediate action to address the issues of global warming, climate change, and deforestation among others.

The George Floyd murder brought to light the ugly truth of racial injustice in modern-day America. The world was small but it is much smaller now thanks to social media and technology. As people become more educated about each other’s cultures through real or virtual interactions, the concept of inequality will be on the back burner. Sure, the stereotype exists but the younger lot are more accommodating when it comes to values and ethics.

A 2019 Morgan Stanley Institute for Sustainable Investing survey of high net worth investors found that 95% of millennials were interested in sustainable investing. The younger generation considers ethics to be of more importance than profits. As such they are increasingly looking at companies that could give them returns without compromising ethics. The study also says that 89% of millennials expect their financial professional to do a deep dive into a company’s ESG factors and issues before recommending an investment opportunity. But why are the millennials able to command such standing?

According to a report from MSCI Inc., millennials are set to inherit approximately $30 trillion over the next few decades. This huge amount of assets that will be handed down by the previous generation to the millennials has gotten the financial industry and corporate America to continue to create better sustainable investing avenues to appeal to the millennials.

Profit vs Purpose

With assets under management in global sustainable funds growing by 12% globally to $2.24 trillion as of June 2021, coupled with 177 new sustainable products being launched around the world, asset managers are continuing to repurpose and rebrand conventional products into sustainable offerings, according to Morningstar’s Global Sustainable Fund Flows Report. The report also states that for Q2 2021, net inflows stood at $139.2bn, down from $184bn in the previous quarter.

BlackRock CEO Larry Fink, in his 2021 annual letter to CEOs noted, “The creation of sustainable index investments has enabled a massive acceleration of capital towards companies better prepared to address climate risk”.

S&P analyzed 26 ESG exchange-traded funds and mutual funds with more than $250 million in assets under management for the period between March 5, 2020, and March 5, 2021. It found that during that time, 19 of the funds grew between 27.3 percent and 55 percent, outpacing the S&P 500 index’s 27.1 percent gains, according to S&P. Parnassus Endeavor Fund saw the biggest gains with 55 percent growth.

It is thus evident that the age-old belief that sustainable investing doesn’t ring in the profits is nothing more than a well-boiled rumor. If the adage were true, the world’s biggest Asset Management Company BlackRock wouldn’t be making sustainability integral to the way the firm manages risk, generates alpha, builds portfolios, and pursue investment stewardship.

According to a report by BoFA & McKinsey, an estimated 60 percent of millennials consume brands that have strong social and environmental responsibility. This group of millennials debates opposes environmental degradation and vehemently fights for social justice.

For the millennial investor who values principles and ethics as one of the core pillars of investment, this comes as nectar to the ears. Looking to bridge the gap between personal well-being and the well-being of society as a whole, investment for the millennial investor is much more than just alpha. The alpha needs to be accompanied by a purpose.

With $ 30 trillion of wealth transfer to the young generation to be carried out over the next two decades and expected Environmental, Social, and Governance (ESG) assets set to exceed $50 trillion by 2025, the Millennial investor is very much in the driving seat moving forward.

So, if millennials are pushing the ESG agenda, are the companies and asset managers responding genuinely? Or are they just viewing this class of investors as the gullible young, to whom you can sell anything as long it is packaged well? Are there challenges and is the reality underneath the surface different from what the giant PR and marketing campaigns are claiming?

The danger of Greenwashing

Today’s investor is no longer confined to the suit-wearing, suitcase-holding, tie-showcasing, financial verbiage wielding gentleman of yesteryears. Today the regular investor will be more likely wearing an Avengers t-shirt, with a backpack and continuously working his fingers on his smartphone. Data is now only a click away and there is no dearth of information. The same goes for ESG too.

One of the biggest challenges facing sustainability is access to useful data that could benefit the investor. There are no doubts regarding the desire for sustainable investing among the young. As per a 2020 report by First Insight, 73% of Gen Z consumers surveyed were willing to pay more for sustainable products. 54% said that for a sustainably made product, they wouldn’t hesitate to pay more than a 10% increase in price.

Considering the increasing appeal of sustainability among the millennials and Gen Z’s, companies and brands with targeted marketing are trying to put forward the narration of their products/services being sustainable-friendly, while the truth would be shades of gray. Needless to say, companies by resorting to such measures, are greenwashing. Greenwashing is equivalent to making an unsubstantiated claim, intended to deceive regulators, stakeholders, investors, and consumers into believing that a company is more environment-friendly than it truly is.

EMAlpha in the Millennial World

There is, undoubtedly, a profound ESG movement going all over the globe right now. From countries to asset managers, from millennial investors to the old school stalwarts, everybody’s counting on the ESG chip for a better future and a better return on investment. There is almost an undisputed global consensus that businesses must incorporate sustainability into their operations.

While the ESG deliberation is appreciable, one can’t deny the challenges facing the ESG movement. Be it lack of proper metrics, frameworks, or quality of ESG information, ESG still has plenty of hurdles to overcome for it to be a sustainable investment instrument. Then there is also the challenge of Greenwashing.

While Greenwashing is a genuine problem for investors which could lead to wrong assessments on how they would factor in the environmental track record of a company in their investment decisions, the solution lies in:

  • Go beyond the official reported version – The data source matters and there is a need to look beyond what the companies are reporting and what the official version is. It is essential to rely on the company-reported data because other sources might not be collating as much information. Although often, there are other sources as well for environment-related information. They include the information disclosure as mandated by regulators and the EMAlpha algorithms scan through unstructured data to pick the unofficial information too.
  • No two ESG scores are the same despite the same headline figure – It is the composition that makes a big difference and all the three parameters that make up ESG need to be evaluated separately. The EMAlpha algorithms provide separate scores for E, S, and G so that an investor can review the sectoral performance more transparently. Over and above, a key feature of EMAlpha’s NLP algorithms is that the attribution analysis is fairly simple and straightforward.
  • An ESG score without context and background is meaningless – The ESG is as much about intent as it is about execution. For this balanced evaluation, having an understanding of the local factors is very crucial. A very good ESG track record (probably more driven by excellent performance in E and/or S) may hide serious Governance related risks and the investors can only ignore them at their own peril. EMAlpha analysis meticulously incorporates this critical part of the ESG evaluation jigsaw puzzle.

References

  1. IBM Study: COVID-19 Pandemic Impacted 9 in 10 Surveyed Consumers’ Views on Sustainability https://newsroom.ibm.com/2021-04-22-IBM-Study-COVID-19-Pandemic-Impacted-9-in-10-Surveyed-Consumers-Views-on-Sustainability (Accessed on 18th August 2021)
  2. Millennials, ESG and the rise in ethical investing https://thefintechtimes.com/millennials-esg-the-rise-in-ethical-investing/ (Accessed on 17th August 2021)
  3. Why is ESG is the future of marketing: a Gen Z perspective https://www.thedrum.com/profile/pinpoint-media/news/why-esg-is-the-future-of-marketing-a-gen-z-perspective (Accessed on 17th August 2021)
  4. ESG Alpha: Bettering the world, bettering your portfolio https://www.etftrends.com/big-ideas-channel/esg-alpha-bettering-the-world-bettering-your-portfolio/ (Accessed on 17th August 2021)
  5. Sustainability-linked bonds help put ESG into practice https://www.worldfinance.com/strategy/sustainability-linked-bonds-help-put-esg-into-practice (Accessed on 17th August 2021)
  6. Why you don’t have to convince Gen Z to invest sustainably https://www.morningstar.com/articles/1052512/why-you-dont-have-to-convince-gen-z-to-invest-sustainably (Accessed on 17th August 2021)
  7. Millennials are a driving factor in the growth behind ESG investments https://www.nasdaq.com/articles/millennials-are-a-driving-factor-in-the-growth-behind-esg-investments-2021-05-25 (Accessed on 17th August 2021)
  8. Why enterprise software must embrace ESG https://www.forbes.com/sites/forbestechcouncil/2021/08/16/why-enterprise-software-must-embrace-esg/?sh=499c92232aed (Accessed on 17th August 2021)
  9. Millennials spurred growth in sustainable investing for years. Now, all generations are interested in ESG options https://www.cnbc.com/2021/05/21/millennials-spurred-growth-in-esg-investing-now-all-ages-are-on-board.html (Accessed on 17th August 2021)
  10. The environment is Gen Z’s no1 concern- and some companies are taking advantage of that https://www.cnbc.com/2021/08/10/the-environment-is-gen-zs-no-1-concern-but-beware-of-greenwashing.html (Accessed on 17th August 2021)
  11. A call for accountability and action https://www2.deloitte.com/content/dam/Deloitte/global/Documents/2021-deloitte-global-millennial-survey-report.pdf (Accessed on 17th August 2021)
  12. Swipe to invest: the story behind millennials and esg investing https://www.msci.com/documents/10199/07e7a7d3-59c3-4d0b-b0b5-029e8fd3974b (Accessed on 17th August 2021)
  13. What the rise of the millennial investor means for a sustainable world https://www.forbes.com/sites/worldeconomicforum/2021/02/08/what-the-rise-of-the-millennial-investor-means-for-a-sustainable-world/?sh=35c13ddd65cc (Accessed on 17th August 2021)
  14. MSCI ACWI IMI Millennials index (USD) https://www.msci.com/documents/10199/b0b8bd59-07ac-20db-d2c5-d3aad4004aac (Accessed on 17th August 2021)
  15. Older Americans stockpiled a record $ 35 trillion. The time has come to give it away. https://www.wsj.com/articles/older-americans-35-trillion-wealth-giving-away-heirs-philanthropy-11625234216 (Accessed on 17th August 2021)
  16. Here are the most popular stocks among Gen Z and millennial investors- and what experts say to do before buying them https://grow.acorns.com/most-popular-stocks-gen-z-millennial-investors/ (Accessed on 17th August 2021)
  17. What are millennials and Gen Z investing in https://www.dailyfx.com/nas-100/what-are-millennials-and-gen-z-investing-in.html (Accessed on 17th August 2021)
  18. At least 57 people died in the Texas winter-storm, mostly from hypothermia https://www.texastribune.org/2021/03/15/texas-winter-storm-deaths/ (Accessed on 17th August 2021)
  19. Heatwave scorches Mediterranean in latest sign of climate change impact https://www.bloomberg.com/news/articles/2021-08-12/mediterranean-heatwave-linked-to-climate-change (Accessed on 17th August 2021)
  20. A new breed of investors are driving purpose plus profit https://www.entrepreneur.com/article/369109 (Accessed on 17th August 2021)
  21. Global sustainable fund assets hit record $ 2.3 trillion in Q2, says Morningstar https://www.reuters.com/business/sustainable-business/global-sustainable-fund-assets-hit-record-23-tln-q2-says-morningstar-2021-07-27/ (Accessed on 17th August 2021)
  22. Net Zero: A fiduciary approach https://www.blackrock.com/corporate/investor-relations/blackrock-client-letter (Accessed on 17th August 2021)
  23. Here’s more evidence that ESG funds outperformed during the pandemic https://www.institutionalinvestor.com/article/b1r9gb5p9k10b4/Here-s-More-Evidence-That-ESG-Funds-Outperformed-During-the-Pandemic (Accessed on 17th August 2021)

EMAlpha Products and Services

In most Emerging Markets, information discovery is a major challenge. For example, even if global investors do show interest, how do they solve the problem of timely access to information? The world’s largest capital allocators hold USD 60 trillion and they include GPIF (Japan), GPF (Norway), ADIA (Abu Dhabi), GIC (Singapore) etc. However, only 10% of the capital gets allocated to EMs and ~90% goes to G10. The big hurdle for EMs is: Foreign investors cannot access relevant local information in a timely fashion.

Most market participants and investors from across the world realise that the low rates in G10 makes EM attractive for investors. But, a) Information access is usually a cost and time intensive process for investors, and b) In many EMs, language is a big barrier and because of multiple regional languages, there is a significant delay before news makes it to the mainstream English language. To address these issues, you need solutions like, a) Real time news collection from multiple languages and, b) Instantaneous machine translation and text analytics leading to actionable recommendations for investors.

There are further challenges such as ensuring that companies behave responsibly and that they adopt sustainable business practices. There is a need to ensure that the investors are contributing towards making the world a better place by making investment decisions which reward responsible behaviour of companies. Case in point, ESG (Environmental, Social & Governance) which is increasingly being used as a filter for investment decisions. There are other issues as well such as which data to use and a lack of a standardized framework for evaluation.

Some of these issues are too important to be postponed to a later date and it is in this regard that EMAlpha is making its contribution. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

EMAlpha also has solutions for Multilingual data collection and real time targeted information which are based on proprietary processes to collect relevant data across multiple markets. The coverage expands across emerging market equity, currencies and commodities and the work has also been very successful in testing the signals in some key markets for live trading strategies. This is a continuous cycle and a virtuous loop that allows for iterative improvement through AI-human feedback.

With developments in AI and technology in areas like NLP, there are considerable new possibilities to bridge the gap in information between Emerging Markets and the more Developed Markets. This is an area which is turning out to be very exciting because some of the tools mentioned were not available even a couple of years ago. This implies that the evolution in the field will only get faster as time goes on. While the Emerging Markets and the Capital Flow Conundrum is a complex one, there is now much more hope and optimism that with the usage of technology, things will only get better.

At EMAlpha, the ESG team is doing further research on why some issues like Social get more prominence as compared to others like Environmental or Governance issues. To look at specific cases in the context of ESG is a very intense yet interesting exercise and this has been an incredible learning experience for the EMAlpha Research team. The data, information and ratings are a humongous challenge for ESG and it takes time to reach to the depth of the issues as the field is evolving very quickly.

EMAlpha is making a solid contribution in tackling these challenges. EMAlpha has solutions for ESG which are practical, user friendly and although not too simplistic yet easy to use. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

We strongly believe that the entire ESG ecosystem requires multiple stakeholders to pull in the right direction in order to make it operational and that will be the most critically determining factor for ESG’s success in making the corporate responsibility actually work. Most importantly, the investors should view ‘E’, ‘S’ and ‘G’ individually and should not confound issues when it comes to the comprehensive ESG evaluation. It is important to understand the right reasons behind ESG investing because this bias could hurt their investment decision making and portfolio performance.

Research Team
EM Alpha LLC

For more EMAlpha Insights on Emerging Markets, please visit https://emalpha.com/insights/. To know how you can use EMAlpha’s unstructured data and ESG (Environmental, Social and Governance) solutions for better investment decisions, please email us at research@emalpha.com.

About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) more accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. EMAlpha works on information discovery and ESG solutions for Investors in Emerging Markets, using AI and NLP tech. Our mission is: “To help increase capital flow, in terms of FDI and FPI, to Emerging Markets by lowering information barriers using AI/NLP”. EMAlpha Products help achieve both alpha and ESG solutions and the idea is to help asset allocators, asset managers, banks and hedge funds along with companies with cost and time efficient access to relevant information. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious. Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

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