As a rising group of wealthy and socially conscientious millennial investors grow up, socially responsible investments and environmental, social and governance (ESG) related exchange traded funds may play a greater role in a diversified portfolio.
On the recent webcast, The Role of ESG Strategies and the Millennial Investors, Ned Dane, Head of Private Client Group at OppenheimerFunds, illustrated the importance of affluent millennials in the investment community ahead as we are about to experience one of the largest wealth transfers of our time.
Specifically, $59 trillion is expected to pass down to heirs, charities and taxes, with the baby boomer generation set to transfer $30 trillion to millennials.
“The largest intergenerational wealth transfer in recorded history is now underway,” Dane said. “When money transfers from one generation to the next, it’s a significantly disruptive event for wealthy families.”
Consequently, it is important for the investment community and industry to recognize the critical role that affluent millennials will play as they acquire more wealth and be put in charge of family portfolios. For instance, surveys have shown that many millennials favor impact investing, which seeks to provide societal or environmental benefits in addition to sustainable investment returns.
Sharon French, Head of Beta Solutions at OppenheimerFunds, also showed that a recent TIAA survey of affluent investors revealed 90% of millennials are more interested in responsible investing, compared to 73% of other generations. Additionally, about 91% of millennials want to work for an employer that makes a positive social impact in the world, and 90% want their investments to deliver competitive returns while promoting social and environmental outcomes.
“Wealthy millennials have a strong interest in sustainable investing, which includes impact investing, ESG and SRI,” Dane said. “But their interest often exceeds their knowledge.”
This leaves the investment industry an opportunity to further educate and potentially attract interest from this rising group of investors.
As investors consider the untapped potential of sustainable investing, French pointed out that sustainable investments can be broken down to three commonly viewed approaches, including exclusionary screening that avoids investments in certain stocks or industries based on ethical guidelines; ESG that integrate environmental, social, and governance factors into fundamental analysis; and impact investing or investments in projects and companies with express goals of social or environmental changes.
The financial industry is already jumping on the increased demand, with socially conscious mutual funds and ETFs now represented by 145 and 26 funds respectively, with $147.2 billion and $3.5 billion in assets, respectively. This rising investment theme may help investors capture the untapped potential of socially responsible investments while still diversifying and generating alpha within their portfolios.
“ESG issues are not widely understood or quickly incorporated into stocks prices, thus creating a clear opening for alpha generation if investors can effectively identify ESG factors that are materially important for a company and make investment decisions accordingly,” French said.
Click to watch a replay of the webcast to earn 1 CE Credit
Laura Nishikawa, Head of Fixed Income in ESG Research at MSCI, helped outline why ESG matters and helped investors hone in on factors to consider. For instance, Nishikawa pointed out that academic studies showed poor ESG performers have exhibited higher cost of capital, higher volatility and accounting irregularities and performances. Consequently, investors may improve their outcome by managing ESG exposures.
“Managing ESG risks was associated with outperformance but only some ESG information was found to be financially relevant,” Nishikawa said.
Consequently, MSCI has developed its own ESG rating system to seperate the wheat from chaff. For instance, under the environment category, the indexer focused on climate change, natural capital, pollution & waste and environmental opportunities. The social category covers human capital, product liability, stakeholder opposition and social opportunities. Lastly, the governance category includes corporate governance and corporate behavior.
Investors who are interested in this refined approach to ESG investments can take a look at Oppenheimer ESG Revenue ETF (NYSEArca: ESGL) and Oppenheimer Global ESG Revenue ETF (NYSEArca: ESGF).
Specifically, ESGL targets broad U.S. large-caps through the S&P 500 but screens through Sustainalyics’ proprietary scoring system that focuses on those with positive ESG attributes and employs a revenue-weighted methodology.
Mo Haghbin, Head of Product and Beta Solutions at OppenheimerFunds, pointed out that ESGF, on the other hand, takes a global approach. The ETF tries to outperform the MSCI All Country World Index with strong ESG practices and re-weights companies based on revenue earned. MSCI ESG Research utilizes a proprietary ESG scoring system and screens companies based on Sharpe Ratio, a measure of risk-adjusted performance.
Financial advisors who are interested in learning more about environmental, social and governance-related investments and the rising influence of millennial investors can watch the webcast here on demand.