Whether investors are willing to take any perceived trade-offs to support ESG in their investments comes down to generational differences. KATHY SKANTZOS investigates.

Research shows there’s an unprecedented acceleration towards responsible investing, with more investors backing environmental, social and governance initiatives through their investments, according to a recent PwC study.

Asset managers and institutional investors are increasingly shifting the focus to ESG to keep up with shareholder demand, with 79 per cent of institutional investors planning to increase their allocations to ESG products over the next two years, according to PwC’s research.

But even though ESG-backed investments are increasing, there is a clear driver dividing investors who support greener investments compared to those who stick to conventional havens. A Stanford University survey of 2,470 investors published this month shows attitudes towards sustainable investing come down to age.

Millennials and Gen Zs drive ethical investing

ESG is overwhelmingly supported by Millennial and Gen Z investors, currently aged 41 or younger, who want to take a stance on climate change and social causes through their investments.

In comparison, Baby Boomers – those aged 58 to 67 – are more concerned about their investments paying for their retirement and living expenses than supporting environmental and social causes, the research shows.

“We see extreme differences in investor support for ESG driven largely by age and stage of life,” says Professor David Larcker, study co-author and Stanford Graduate School of Business academic.

Younger investors expressed concern for social issues such as diversity, income inequality and labour conditions, as well as environmental and sustainability issues, with 70 per cent of this group saying they are very concerned about issues such as cutting carbon emissions and increasing renewable energies.

In contrast, older investors in their mid-50s and beyond have almost the exact opposite view. Only 35 per cent are very concerned about environmental issues, while the remaining 65 per cent are somewhat or not at all concerned.

The same pattern is true for social issues. Around 65 per cent of young investors are very concerned about issues such as workplace diversity, income inequality and workplace conditions, compared with only 30 per cent of older investors. Governance issues, in comparison, were less of a concern for younger investors.

“ESG activism is clearly driven by younger investors,” Stanford Graduate School of Business academic and the study’s co-director and co-author Professor Amit Seru says.

“There are clearly generational differences when it comes to perceptions of ESG,” he says. “Young investors express high levels of concern for social and environmental causes – particularly young investors who are very wealthy – while older investors express very little concern for these.”

Personal wealth plays a part in how younger people invest, with Millennials and Gen X investors with more savings and larger investment balances rating ESG higher than those with less money to invest.

Purpose over profit pushing ESG

The research shows that older investors are not as willing to bear the risk of having to pay the so-called cost-benefit trade-off of environmental or social initiatives, while younger investors say they are.

“Older investors who are living off their retirement savings are much less concerned with environmental and social issues and much more concerned with making sure fund managers focus on generating financial returns to support their spending needs,” Professor Larcker says.

Around a third of younger investors surveyed claimed to be willing to lose more than 10 per cent of their retirement funds to help bring about social and environmental change to company practices. However, Baby Boomers were overwhelmingly opposed to financial losses in support of environmental and social goals and were less interested in supporting social activism.

“Investors under 40 want to see companies make progress across a broad range of environmental and social initiatives and claim to be willing to suffer personal financial loss – sometimes a very large loss – to see those changes realised,” Professor Seru adds.

“The many years they have until retirement and high expectations for future stock market growth might encourage them that any cost due to ESG activism can be recovered.”

Influencing ESG practices through investments

The world’s largest institutional investors including BlackRock, Vanguard and State Street are responding to the demand in ESG investing, actively taking a public stance to advance ESG initiatives among portfolio companies.

Larry Fink, CEO and chairman of BlackRock, the world’s largest institutional asset manager, vocally advocates for environmental sustainability among the institution’s portfolio companies and takes a firm stance on ESG investing.

The Stanford research shows that around 80 per cent of Millennial and Gen Z investors say it is important for investment companies to use their power to influence environmental and social practices, whereas only around 42 per cent of Baby Boomers felt the same.

In this same vein, 85 per cent of Millennial and Gen Z investors say they support fund managers advocating for environmental causes even if it decreases the value of their investment. By contrast, only 35 per cent of older investors support fund managers doing so, and 65 per cent oppose it.

Reflecting these results, most young investors (78 per cent) own at least one mutual fund or exchange traded fund that’s restricted to socially responsible investing, while only 19 per cent of older investors hold such funds.

In Fink’s annual letter to CEOs, this year he wrote: “It’s been two years since I wrote that climate risk is investment risk. And in that short period, we have seen a tectonic shift of capital. Sustainable investments have now reached $4 trillion. Actions and ambitions towards decarbonization have also increased. This is just the beginning – the tectonic shift towards sustainable investing is still accelerating.

“We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.”

How Australia fares in ESG uptake

Australia’s largest independent study looking into the attitudes towards ESG investing, the  Investment Trends ESG Investor Report, showed an uptick in 2021 of Australians considering ESG factors in their investing decisions.

“In the wake of the pandemic, social movements like BLM (Black Lives Matter) and ever-frequent environmental concerns like bushfires and droughts, Australians are closely examining how their actions impact the world around them. Increasingly, many are realising how they allocate money plays a vital role in supporting positive initiatives or avoiding harmful outcomes,” Investment Trends Head of Research Irene Guiamatsia said.

The follow-up ESG survey of Australian advisers and investors, conducted in 2022 by Investment Trends in collaboration with Australian Ethical, showed three in four Australian investors are aware of responsible investing, with record amounts of money pouring into sustainable and ESG funds.

Macquarie University Business School and online trading platform moomoo is set to conduct an industry-first national Australian study to follow up the latest research to come out of Stanford University.

The Australian study will monitor the behaviour of multiple groups of investors to understand how exposure to a company’s ESG score influences a person’s decision to invest and investigate how sustainable trading education and transparency of company social responsibility credentials impact Australian investor behaviour.

“We have a good understanding of the importance of a company’s financial performance in investor decisions, but we don’t yet have enough information in Australia to truly understand the role a company’s ESG performance plays in the decision process,” Macquarie Business School Professor Tom Smith said.

“This study will help us better understand the drivers and barriers affecting socially-conscious investor behaviour – and shed insight on how decisions change when investors have greater transparency around where their money is really going.”