Young people are willing to sacrifice returns for ESG

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Young people are willing to sacrifice returns for ESG

Prasit Photo | moment | Getty Images

When Hannah Cohen invests in a stock or fund, one of the things she looks for is whether the mission aligns with her personal values.

For example, the 25-year-old data consultant has invested in funds like that ALPS Clean Energy ETF and that Global X Autonomous & Electric Vehicles ETF as someone who cares about climate change. Likewise, big oil stocks are largely out of the question.

“It gives the message that people care and care,” Cohen said. “I don’t know how much of a difference I make as an individual, but I think it’s important to at least play a role and show that I’m committed to these causes, both physically and emotionally.”

What young investors want

Recent poll data shows that Cohen is not alone. Nearly two-thirds of Gen Z investors want to allocate their portfolios to support causes close to their hearts, according to a July survey by US Bank of around 4,000 current and prospective investors.

This compares to 59% of Millennials, 45% of Gen Xers and 30% of Baby Boomers.

And active young investors are willing to sacrifice returns to achieve that goal. The survey found that more than four-fifths of Gen Z and Millennials would be willing to underperform S&P 500The 10-year average return of 12% is designed to ensure the companies they’ve invested in are aligned with their beliefs. Just 73% of Gen Xers and 65% of Baby Boomers said the same thing.

Nearly a fifth of Gen Z investors said they would accept returns of between 9% and 11.8% instead of the full average return of 12%. Almost 30% would require between 6% and 8.9%, while another 30% would accept returns between 3% and 5.9%.

Matthew Ivler, a 23-year-old machine learning engineer, began his investing journey in March 2020, shortly after the pandemic triggered a market crash. Initially, he allocated his portfolio mostly to individual stocks and focused more on receiving consistent dividends than growth. His portfolio now consists mostly of exchange-traded funds — which has also transformed the way he aligns his investment strategies with his values.

“With [ETFs]I’m just like, ‘Yeah, that’s going to haunt the market.’ But at the end of the day, I invest in all of these companies, and some are probably doing things that I disagree with,” Ivler said. “But I choose a single stock.” [one] I think that is fundamental.”

He quoted home depot as one of his original holdings, which he later sold after controversy over the company’s donations to federal lawmakers who objected to the results of the 2020 presidential election. chevrons was also part of his portfolio when he first started investing, but later reduced his exposure to alternative energy companies as he became more climate conscious.

His portfolio now includes names like Edison Internationalwhich deals with renewable energy solutions, as well as the Invesco Water Resources ETF, which focuses on utilities that help conserve and purify water. Ivler’s year-to-date return on its investments is about 9.5%, while the S&P 500 has increased by almost 15% over the same period.

Send a “signal”.

The US Bank survey builds on previous data that points in a similar direction. According to a survey by the Stanford Graduate School of Business, the Rock Center for Corporate Governance and the Rock Center for Corporate Governance, younger and wealthier investors are more likely to support environmental, social and corporate governance (ESG) issues and risk returns on those values Game Hoover Institution was released late last year.

The data comes at a time when accountability measures and standards for ESG investing are hotly debated. President Joe Biden used his first veto in March to save a US Labor Department rule on investing in ESG funds that many Republicans wanted to kill. Washington lawmakers continue to argue about ESG reporting requirements for companies.

According to Julie O’Brien, head of behavioral research at US Bank, a common behavioral phenomenon linking age and ESG could be that young adults are inherently looking for ways to express their identity.

Investing can provide another way for young adults to say, “This is the kind of person I am, and now I can act in a way that reflects my identity,” O’Brien said. “What we’re seeing with ESG investing is that it creates something that you can signal to other people.”

O’Brien also said that with the increasing amount of information available and the ubiquity of social media, younger generations may feel more connected to ESG.

‘Must be done’

Of course, attitudes toward socially conscious investing vary when considering the different identifying factors within age groups. Among active investors, US Bank found that Hispanic and black investors are significantly more likely to use investments as a vehicle to support causes close to their hearts.

Dylan Assi said that when it comes to personal investing, it’s harder to ignore ESG issues because you identify yourself as a visible minority. The 22-year-old, a passive investor who first became involved with ESG in college, said it can be clear when a company is “putting money into action”.

“There is an obvious problem that we have on the environmental side but also on the social side,” said Assi, who works in real estate private equity and investments. “Basically, you have to do the right thing.”

Assi said he’s noticed the misperception among other young investors that they need to underperform the broader market to mollify personal values. Rather than looking for companies that appear “perfect” in every respect, look to those that support ESG trends more broadly. He pointed to it Apple And MicrosoftAn example is the work on sustainability in the cloud.

Cohen, whose portfolio is up about 35% this year, agreed that investors don’t necessarily have to forego earnings to make socially conscious decisions. However, she said that without access to expensive screening software, it can be difficult to find trustworthy research on how companies are performing on ESG. It’s even harder to find companies that work in the social or corporate governance space, she added.

Assi said he usually looks at publicly available ESG reports, but recognizes the potential for bias as these are usually authored by the companies themselves. On the other hand, Ivler said he doesn’t actively search for a company’s ESG reports, but will look at the general news to gain insight into a company’s actions.

Despite obstacles, O’Brien believes that an ESG focus in investing will ultimately benefit young investors when it comes to achieving their financial goals. This makes investing more concrete and tangible, she said, which is especially important as young people struggle with uncertainty and an abstract future.

“We often forget that investing isn’t just about money and math,” she said. “It’s the psychology and things that are inherent in our humanity that we have to deal with.”