The millennial generation and wealth transfer paves the way for ESG investing boom

While ESG (environmental, social, and governance) investing is growing across all investor segments, it’s the millennial generation that’s leading the trend. A huge wealth transfer in the upcoming decades could change how money is invested.

ESG investing involves considering non-financial factors when making investment decisions across three core areas: environmental, social, and governance. This may be done to reflect investor values or to identify risk and growth opportunities. While ESG issues are often associated with climate change and the environment, they can also include things like how a company treats its employees or the size of executive bonuses.

ESG investing is growing in the UK. Figures from the Investment Association show UK investors added almost £1 billion a month on average to responsible investment funds in 2020. Yet this remains a relatively small portion of the £8.5 trillion assets under management. However, there could be a shift that pushes ESG investing into the mainstream in the coming decades.

According to Prudential’s Family Wealth Unlocked report, the pandemic has led to more than half of UK adults moving into sustainable investments. Some 45% said they only want to invest in ethical companies and funds, suggesting that the amount of money invested with ESG criteria in mind is set to rise.

However, there are generational differences. 6 in 10 millennials said Covid-19 had increased their appetite for ESG investing. In comparison, 44% of Generation X and 35% of baby boomers agreed.

While millennials are most likely to invest in ESG opportunities, they’re also the generation that has had the least time to build up wealth. As a result, as millennials generate wealth and invest more, ESG investments will likely rise. It’s not just generating their own assets that will lead to millennials playing a greater role in the investment market. A wealth transfer could drive an ESG investing boom.

The £5.5 trillion wealth transfer that could lead to greater ESG investing

Previous research produced by the Centre for Economic and Business Research estimated that between 2017 and 2047, £5.5 trillion would pass between generations. Coupled with the millennial generation building up their own wealth, this shift could have a huge impact on the distribution of assets and the role of ESG issues when investing.

In fact, according to a report in the Financial Times, ESG investments could experience a three-fold jump in assets in Europe by 2025. Sustainable investments are forecast to reach €7.6 trillion across the continent, taking their share of the European fund sector from 15% to 57%.

With ESG investing set to continue growing, is it something you should be thinking about now?

As with all investment opportunities, it’s important to weigh up the pros and cons with your circumstances in mind. Before you review your portfolio, here are three questions to consider:

1. Why do you want to include ESG issues in your investment decisions? Understanding why you want to invest, including incorporating ESG issues, is important. It can help you select the right investments for you. Perhaps you want your investments to have a positive impact on communities around the world or you may want to mitigate climate risk.
2. What ESG criteria are important to you? ESG investing covers a huge number of different issues and there’s no one-size-fits-all approach. Setting out what your priorities are can ensure your portfolio reflects this. However, ESG investing can mean you have fewer choices, and you may need to compromise on some areas.
3. Do you want your whole portfolio to reflect your ESG criteria? You don’t have to make ESG issues a part of all your investment decisions. You may choose to reflect this in just a small portion of your portfolio to start with, then review this decision at a later date. Make sure you focus on the long term as, with all investments, short-term volatility is to be expected.

Creating an investment portfolio that suits you

If you’d like to incorporate ESG values into your investment portfolio, it’s still important to consider which investments are right for you. That means continuing to incorporate things like your investment goals and risk profile in addition to ESG criteria.

As with all investments, remember that investing should be done with a long-term focus and that investment values can fall, as well as rise. If you’d like to discuss ESG investing and your goals, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.