Younger investors want more ESG — but not in prepackaged funds
For the past decade, the narrative around sustainable investing has centered on millennials and Gen Z's virtuous habits. Younger generations, after all, broadly support issues like social reform and climate change policy. So it makes sense they would lead the world in sustainable investing.
But as it turns out, according to a recent survey from Nuveen, the biggest proponents of environment, social, and governance (ESG) investing have been baby boomers and Gen Xers. Some of this may be because of performance. The iShares ESG Aware MSCI USA ETF, the largest ESG fund in circulation, outperformed conventional large-cap funds in each of the past two years, suggesting that there is no longer a trade-off between doing good and doing well.
The other thing is older generations may not be as concerned with the exact holdings in an off-the-shelf ESG fund. In a recent article, we highlighted how many of the fastest-growing ESG funds "look a lot like products that investors already own, just with a shiny green label." The high-flying iShares ESG ETF, for example, holds Apple, Microsoft, Facebook, Google, and Amazon in the same proportion as the S&P 500. What's more, the fund maintains a footprint in fossil fuel producers, a sector not known as the standard-bearer for green practices.
It's not surprising, then, that younger generations haven't gravitated to generic ESG funds. Millennials and Gen Zers see the brands they use as a reflection of themselves. According to a Forrester study, more than half of zoomers will ensure a brand's values align with their position on corporate governance and social responsibility before making a purchase. A different study found over 80% of millennials feel the same way about the brands they frequent.
What those values are varies from one person to the next. But it’s clear that millennials and zoomers are leading less homogenous and more purposeful lifestyles than previous generations. For example, data from YouGov found that millennials were more likely to become vegetarians to reduce their impact on the planet. Consumption has, as a result, become a means of self-expression and purpose rather than a way to conform with societal norms. And millennials and zoomers now need more personalized products and services to match.
Their investments are no different. With generic ESG funds, which have sometimes been called greenwashed or glorified tech funds, millennials and Gen Zers don't have much flexibility to invest in causes close to them. If anything, some companies held in off-the-shelf funds magnify the issues that younger generations care about (i.e., fossil fuel producers in the iShares ESG ETF). What's needed is more options. A Morgan Stanley survey found that 65% of respondents cited a lack of choice as the primary barrier to sustainable investing. But more of the same won't solve the problem; it will just exacerbate what some investors already believe about ESG. A better solution would be to give investors the power to design their sustainable investments as they see fit.
Doing this effectively requires technology. Recent breakthroughs in financial technology now allow advisors to create custom portfolios that address their client's individual preferences, whether they are a zoomer who wants to invest in carbon-neutral companies or a millennial that may still harbor doubt for Big Banks. Some of the most popular methods to do so are custom and direct indexing. We've highlighted the benefits of both in prior posts (here and here).
But some of it bears repeating; both approaches unlock a level of customization that was otherwise unattainable with an off-the-shelf fund. And as our CEO Samir Vasavada recently noted, "Millennials and Gen Z won't accept the same one-size-fits-all portfolios of the past. Their demands for more personalization will further accelerate the unbundling of financial advice and products."
This can have significant implications for advisors looking to reach a new generation of investors. Failure to adopt technology, which allows clients to customize their portfolios based on particular sustainability preferences, will risk alienating millennials and zoomers, who notably, want more effective ways to make a difference with their investments.
May 21, 2021