Are millennials driving the growing interest in socially responsible investing? Particularly over the past year, this large generational cohort has many in the asset-management industry stumbling over themselves to figure out what ESG investors want and how best to offer it to them.
But what’s striking isn’t that millennials have different expectations for companies’ environmental and social behavior than other generations do but that they have different expectations for how their portfolio should reflect this. As we noted in a previous blog post, studies have shown that millennials, their parents, and their grandparents equally agree—80%—with the statement that companies should take responsibility for their impact on the environment and social well-being. Where millennials appear to differ from older generations is that they take it for granted that this impact should be considered when building their investment portfolio—90% vs. 40%. In this respect we might think of millennials as not only the first generation to be digital natives but also the first to be ESG natives.
So what will Generation ESG want out of their investment experience? As we construct our outlook for socially responsible investing in 2019, we think it comes down to two broad ideas.
ESG ETFs: One size doesn’t fit all
In our experience the best way to help socially responsible investors move beyond talk to action is to make their lives easier. In that sense ETFs might be a popular choice, and much has been made of the spike in ESG-oriented ETFs launched in recent years. But equally attention-getting is the lack of meaningful flows. According to ETF.com, only one ESG ETF has exceeded $1 billion in assets under management. And despite their growth, they make up well below 1% of the total ETF market. What gives?
The problem is twofold. One, when it comes to deciding which stocks are “good” or “bad” from an ethical perspective, few investors see eye to eye. This gives ETF providers the unenviable task of trying to build standardized one-size-fits all products for an investor who needs anything but that. In addition, many investors don’t have the time or skill set to figure out what the heck is even in each ESG-flavored ETF, which further accounts for the limited flows.
Second, there’s natural tension between trying to decide which stocks make the cut from a social perspective and trying to be the market (not beat the market), which is the entire point of passive investing and for which the ETF market is a natural home. From this perspective it’s not surprising that the most popular ESG ETFs are those that could serve as broad allocations rather than narrow thematic ones. But even the broadest of these will never be a perfect substitute for the market as a whole—and are unlikely to attract passive investors in the same way as one based on a standard benchmark.
ESG investing that’s integrated, not segregated
What we’re seeing more and more is that investors just want environmental and social awareness to be part and parcel of their usual investment options rather than a special stand-alone offering. They want to know that their active managers aren’t turning a blind eye to issues that could materially affect company profits and that their passive managers are using voting and engagement to safeguard against the loss of capital. As a matter of last resort, they may need special portfolio construction to draw a line in the sand against certain products or behaviors that are incongruent with their individual or organizational principles.
The bottom line
Socially responsible investing isn’t something new and exotic anymore. In fact, it hasn’t been for some time. And yet many of us in the investment community continue to treat it as such, keeping it at arm’s length and offering it separately from other products. And when we do offer it, we tend to package it as a generic catch-all “product.”
This is an approach newer generations of investors will have little patience for. And it’s not just millennials—investors of all ages have come to expect more from their responsible-investing choices, and it will be up to us as investment professionals to deliver it. In 2019 and beyond, investors are demanding that ESG move out of a ring-fenced, specialized product and become a mainstream solution, integrated tightly into every strategy’s investment process.
Potential Parametric solution
For more than 20 years, our Responsible Investing capability has offered a robust and continually evolving menu of ESG screens and licensed indexes, giving investors a wide range of portfolio design choices. In addition, our proxy-voting guidelines follow corporate-governance best practices to safeguard shareholder capital, and they consider the relevant environmental and social implications of management and shareholder proposals.
Jennifer Sireklove, CFA, Managing Director, Investment Strategy
Ms. Sireklove leads the Investment Strategy team at Parametric, which is responsible for all aspects of Parametric’s equity-based investment strategies. In addition, she has direct investment responsibility for Parametric’s emerging market and international equity strategies, and chairs Parametric’s Stewardship Committee. Previously, she helped build Parametric’s active ownership and custom ESG portfolio construction practices. Prior to joining Parametric in 2013, she worked in in equity research, primarily covering the energy, utility and industrial sectors at firms including D.A. Davidson and McAdams Wright Ragen. Jennifer earned an MBA in Finance and Accounting from the University of Chicago, and a B.A. in Economics from Reed College, has been a CFA® charterholder since 2006 and is a current member of the CFA Society of Seattle.
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