As Millennials Age Into Investors, Socially Conscious Funds Boom
View of a windmill farm and power lines in La Ventosa, Mexico. Patricia Castellanos/AFP/Getty Images)
Millennials are known for a lot of things these days, but one attribute is their desire to live by the values they espouse. Many try to do so by recycling, reducing their carbon footprint and giving to causes they believe in. But what about when it comes to investing? It seems that this group is putting their money where their mouth is on that front, too. They are doing so by investing in Environmental, Social and Governance (ESG) funds that invest in the stocks and bonds of companies that adhere to specific ESG guidelines. Each fund’s investment criteria differs slightly, but most look to invest in companies that promote issues such as supply chain transparency, a reduction on reliance on fossil fuels and a safe and fair workplace environment. By and large, they’ve been delivering competitive financial returns for their investors.
Those in the 18 to 34 age range (as Pew defines the generation) have been leading the charge in increasing the popularity of these funds. The U.S. Census Bureau estimates that there are currently over 75 million millennials in the U.S.—the largest living generation in the country, and they also represent the largest group to invest in ESG funds. “Millennials have been at the leading edge of the move toward ESG investing and continue to become a bigger part of the investment world,” Jon Hale, director of sustainable investing research, Morningstar, an investment research and investment management firm, told Observer. “They are strongly interested in investing this way and in looking at sustainability, and they are making an impact with their investments that goes beyond returns.”
According to the 2017 Wealth and Worth report, released by US Trust, Bank of America’s private wealth management arm, 76 percent of millennials said they consider their investment decisions to be a way to express their social, political and environmental values, and 88 percent said that a company’s impact in these areas is an important consideration when they make investment decisions.
But does this make for a smart financial investment, and do ESG funds perform well?
The simple answer is “Yes.” When Socially Responsible Investing (SRI) funds were first introduced, back in the 1980s, they were geared toward “negative screening,” or avoiding investment in businesses involved in the sale of alcohol, tobacco, weapons or gambling. Word on the street was that they also brought in lower returns.
Today’s ESG fund managers have come a long way since then. Most use a combination of negative and positive screening methods to evaluate a company’s environmental sustainability practices and its social impact. Performance-wise, these funds are also now performing just as well as comparable funds that don’t take ESG metrics into consideration.
Kelly Coyne, vice president of business development, Pax World, a sustainable investment firm, told Observer, “There used to be a stigma that followed sustainable investing, but when you dive into the research, analysts now find that it’s no longer the case.”
In fact, incorporating ESG considerations into the investment process has not only improved the performance of many funds, but has also lowered investment risk, she said.
It turns out that when companies address issues related to climate change, workplace safety and fair treatment of employees, those companies also end up facing fewer lawsuits, making them more attractive to both customers and investors. Overall, companies that tend to do well on sustainable metrics also, often, do well on financial performance.
As of June 2017, there were 187 mutual funds and exchange-traded funds (ETFs) in the U.S. practicing sustainable investing methods—35 of which were launched in 2016 and another dozen in the first half of 2017, according to Morningstar. While each may use a different method for choosing investments, many are similar in approach.
The analysts at Parnassus Investments, an ESG investment firm, make it a priority to research a company’s exposure to fossil fuels and whether or not the company is moving toward using more renewable energy. “We also look into the company’s record on being a good corporate citizen, transparency and how they treat their employees—all of which are helpful for performance,” said Iyassu Essayas, senior ESG research analyst at Parnassus.
Pax World takes a similar approach to investing and also considers gender diversity analysis when researching companies. The Pax Ellevate Global Women’s Index Fund looks, specifically, for companies that embrace gender diversity on their boards and in management positions.
What will it set you back to invest in an ESG fund? Most fund managers charge investors a small fee to invest in their funds, typically about 1 percent or less of assets invested, depending on if the fund is actively or passively managed, as with index funds. They also may have a minimum investment requirement. Robo-advisor Betterment, however, recently launched its Socially Responsible Investing Portfolio, an ETF-based portfolio with an SRI tilt, with no minimum investment requirement.
As with all types of investment vehicles, there is a range of manager skills and fund quality, so investors should be discerning when selecting a fund. But millennials, as an investing segment, may have found their niche. “The evidence suggests that those interested in investing in sustainable funds can receive competitive performance, while also addressing their sustainability concerns,” said Hale.