Responsible Investing: Responsibility can bring rewards

Millennials and their savings can be the catalyst for a greener world, writes Tim Fright.

The climate in the Antarctic Peninsula has warmed by 3°C meaning that once stable ice shelves are now retreating. Since the 1950s this is a loss of 25,000 km2 of ice shelf, contributing to rising sea levels. Climate change has potentially catastrophic consequences for us all, but the levels of awareness amongst investors (millennial investors in particular), and thus the opportunities to avert disaster, are increasing.

The Association of the Luxembourg Fund Industry and Deloitte (2016) note that half of assets under management by 2030 will belong to millennials and those in the so-called ‘Generation X’. How they put those assets to use will be critical. According to Morgan Stanley research, 86 percent of millennials say they are interested in socially responsible investing. Millennials are also twice as likely to invest in a stock or a fund if social responsibility is part of the value-creation thesis.

Ordinarily, private investors would look to the wealth management industry to get their wealth to work for them, however this is not the case for millennials for two reasons. Firstly, the wealth management industry itself is more concerned with a baby boomer cohort who are heading to retirement, and thus currently have more assets to manage. Secondly, millennials themselves have grown up online and are comfortable buying goods and services online, or investing online. According to a 2016 Legg Mason Global Asset Management survey, which polled more than 1,000 investors aged between 18 and 39, 85 per cent of UK-based millennials said they were comfortable with robo-advice, but only 37 per cent of investors aged 40 to 75 trusted online advice.

By providing the robo-advice tools to invest responsibly, and illustrating that responsibility can bring rewards, more millennials will have the opportunity to use Environmental, Social and Governance (ESG) criteria in their investment decisions. This will drive investment towards those companies that are performing responsibly and millennials can help limit the effects of climate change within our lifetime. Climate Friend is a digital asset manager that uses ESG criteria as part of the investment process in order to enable responsible investing whilst also generating competitive returns for our clients.

The historical concern against using ESG in the investment process was the idea that to do so would sacrifice returns. This concern still exists, but is not backed by the data. At a global level, MSCI data show that the MSCI Low Carbon Target Index has modestly outperformed the MSCI ACWI since 2010. At an emerging market level, the Financial Times earlier this year reported that “the MSCI EM ESG Leaders Index has been outstripping the MSCI EM benchmark consistently since the 2008/09 financial crisis. In June, the outperformance gap reached a record of 51.84 points, double its span in early 2013.” From a capital preservation view, the Financial Times reported that using US data, a Bank of America Merrill Lynch report found that an investor who only held stocks with above-average ESG scores would have avoided investing in 90 per cent of bankrupt companies seen since 2008. 

Simply put, the more millennials that want to invest in companies that do the right thing – the more companies will do the right thing. By investing in responsible, well-run companies, millennials can put their money where their mouth is and generate returns whilst also helping to reduce the environmental risks that we face this century. With rising temperatures, and rising oceans, it is imperative that we do so sooner rather than later.