Welcome to the era of global sustainability. This commitment to making our world a better place for both us and future generations has taken hold, particularly among the current generation, Gen Y. In a survey by Bentley University, 84 percent of Millennials said that they care more about making a positive difference than they do about workplace recognition.
Sustainable investing—also known as socially responsible investing (SRI)—integrates environmental, social, and governance factors (ESG) into the decision as to which companies to invest in. This dedication to doing good has affected not only Gen Y’s social and political choices, but choices governing where they invest their money as well.
Apple CEO Tim Cook caused a stir that both rocked the financial industry and invigorated many of the youth who are rising within it. Back in February, Cook publicly avowed the company’s commitment to a triple bottom line—to include social and environment concerns in addition to profit or loss—by telling Apple’s criticizing shareholders, “If you want me to do things only for ROI reasons, you should get out of this stock.”
Virgin CEO Richard Branson was not far behind with his own sentiment relating to the sustainability of his company, “More businesses should be following Apple’s stance in encouraging more investment in sustainability. While Tim told sustainability skeptics to ‘get out of our stock’, I would urge climate change deniers to get out of our way.”
Such strong backers for sustainable business practices also come with investors who are committed to supporting and contributing to the growth of these sustainable businesses. According to Bamboo Innovator, in the U.S., the market for sustainable investments has increased by 22 percent in the past two years, reaching $3.74 trillion in total managed assets.
Statistics illustrate the dedication Gen Y has to sustainable investing. According to a study by Spectrum’s Millionaire Center, on average, 51 percent of Gen Y investors consider socially responsible investments to be an important aspect of their decisions. This is compared to Gen X investors (42.5 percent), baby boomers (37.5 percent) and WWII-aged investors (33 percent). The largest change has occurred between Gen X and Gen Y, which points to the fast adaptation of sustainable investments in the younger generation.
Women in general are strong supporters of this movement as well, and actually more so than men. A U.S. Trust survey reported that 65 percent of women ranked social, political or environmental impacts in evaluating investments “somewhat” or “extremely” important, but only 42 percent of men felt the same. As far as who actually acts on sustainable investing funds or strategies—those who integrate ESG factors into the investment process—women trumped men by a margin of 59 percent to 34 percent.
This phenomenon is not in any way exclusive to the U.S. either. In Great Britain, for example, the Great British Money Survey concluded that renewable energy is the top investment choice for 18 to 24 year olds, beating out property. Bamboo Innovator reported that, in the UK, assets under management in green or ethical funds, one type of sustainable investment, increased from $6.5 billion 10 years ago to $18 billion as of 2012.
This shift in investment preferences and practices means huge changes for the future financial and investment industry across the world. The World Economic Forum predicts a $41 trillion wealth transfer from baby boomers to Millennials over the next 40 years.
Sustainable investing will also mean changes to a financial market structure that appears archaic in the new information and technology age and that generally doesn’t appeal to or benefit the current generation of investors.
According to The Guardian: “Many senior industry leaders are generally from a generation that believed natural resources were abundant, hierarchies of power led to prosperity and decades of hard work culminated in a comfortable retirement.”
These beliefs influenced the institutions built during that generation, and a vast system of checks and balances that put precedence on shareholder value emerged. However, that definition of value is shifting quickly, proving those institutions to be outdated and in need of reform.
This is ultimately creating an intergenerational equity gap. But the results presented are two-fold: 1) Potential social unrest and 2) Opportunity for innovation, activism and change. Occupy Wall Street was one example of potential social unrest, but one can only hope that the current and past generations will work together to embrace the opportunities that also come along with these shifts in thought.
Like it or not, fundamental changes – such as new and established companies aspiring to be more transparent – to offer access and to make a positive social or environment impact on the world, are on the horizon. Both companies and investors will need to rework their strategies in an ever-changing financial environment.
Both new and established businesses will be challenged by the environment created by sustainable investing. Established businesses will be expected to reform business practices to serve ESG needs. Both new and established businesses will be confronted by the demand for innovative products and services that serve this explicit purpose.
As money shifts to a new generation, a majority of whom are dedicated to sustainable investing, businesses will need to determine their best moves for appeasing the new money holders. Not doing so could mean risking a significant loss of funding as they lose support from new investors.
According to a survey performed by Deloitte, more than 80 percent of Millennials percent think that businesses can do more to address some of the world’s biggest problems. It is this belief that will drive their investment choices and encourage them to abandon those who make no effort to benefit the world around them.
Businesses may not realize, but they should adopt sustainable business practices not only to “do good” but also because it makes financial sense. Many sustainable practices, such as recycling, energy conservation and telecommuting, help businesses save money. Participating in sustainability also means an elevated presence in the mind of the current generation.
Millennials believe that there is hope for businesses. According to the Deloitte survey, more than half of Millennials believe that business, more than any area of society, will achieve the greatest impact in solving society’s biggest challenges.
As Millennials are adapting quickly to these changes, so too will businesses need to follow suit. And Millennials believe that when businesses do, the world will be a better place because of it. They will put their muscle and consumer and investment dollars to work for those businesses that they value and respect.
Investors’ main priority has always been to generate positive returns, but now more than ever, they are also being held to the responsibility to generate positive impact as well.
As far as established investors themselves, many are embracing these financial changes. For example, according to The Guardian, City hedge fund manager Lord Stanley Fink and Paul Simon invest heavily in renewable energy.
Entrepreneur Elon Music is creating a next-generation energy company in SolarCity, an electric car company in Tesla, and SpaceX, a privately owned space transport company—all of which are meant to challenge the incumbents in traditionally status quo industries, says The Guardian. In fact, Musk has seen great successes, as SolarCity has enjoyed a 400 percent increase in its stock price over the past year and Tesla has seen a similar rise in its own share price.
What is holding back other reluctant investors is the soured experience they had when sustainable investing first came around. Plus, many were badly burnt during the financial crisis and are still trying to recoup their losses.
A Spectrem study found that, in terms of investment selection criteria, 94 percent of wealthy investors consider the level of risk, 89 percent consider diversity, 81 percent consider tax implications, and three-quarters consider the reputation of a company. This is compared to only 19 percent of wealthy investors surveyed who consider the social responsibility of their investments.
Of the other 81 percent, these individuals said that their lack of interest in socially responsible investments were because their investment objectives were purely financial.
However, according to a 2012 report from DBA Advisors, companies with positive ESG attributes have actually proven to be better financial performers in the long run. These attributes are appealing to both Gen Y investors, who are now entering the market in full force, and older generations of investors who are taking notice of the sustainability movement. These businesses’ financial futures are bolstered as a result.
With all this being said, even the most well-intentioned investor needs to be careful about where they invest their money, as some companies claim a commitment to sustainable business practices merely as a press relations ploy rather than actually holding to their promises.
This trend is here to stay, and businesses and investors need to learn to evolve with the changing times. Sustainability is not only the future of our environment, social world, and governance, but also of the financial industry as we know it.
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