An influx of young investors are leading a charge of socially responsible and sustainable investing, funneling their money into investments and projects that serve the greater good.
In financial circles, socially responsible investments (SRI) and funds geared toward environmentally, socially and governance-friendly (ESG) projects have grown in popularity with millennial investors. Those activities include avoiding investment in companies associated with addictive substances and vices — like alcohol, gambling and tobacco — and seeking out companies engaged in social justice or environmental sustainability.
Socially responsible investing (SRI) now accounts for $26 trillion, a 2018 study from Harvard University’s Kennedy School of Government found, which is more than quarter of all assets under professional management worldwide. The study found that millennials are increasingly making investment decisions that weigh the impact on society.
Separately, U.S. Trust found that 76 percent of high net-worth millennial and Generation Z investors have reviewed their assets for ESG impact, while Morgan Stanley found millennial investors to be twice as likely as others to invest in companies that incorporate ESG practices.
Although sustainable investing has existed since the 1970s, the new wave of young investors are interested in more than just stable financial returns.
“The Gen-Z and Millennial generation is extremely misunderstood,” said Brandon Krieg, Co-founder and CEO of Stash, a micro-investing app with a heavy millennial and Gen Z client base. “They do care about activism and the brands that they agree with.”
Financial activism is nothing new, but the democratization of investing has made it easier for small investors to nudge bigger companies to be more mindful of what kinds of activity their money is funding. For example, last year major asset managers like BlackRock were pushed to divest in ETF’s containing gun makers and retailers tied to the sale of firearms, after a string of mass shootings.
The growth of financial technology and retail investing has prompted a number of younger investors to actively decide how to align their money with their values. It’s also prodded investment firms to offer the public an ever widening range of vehicles in which to do so. According to Morningstar, in 2017 there were 234 exchange-traded funds (ETFs) and mutual funds that invested in a socially responsible way, having doubled since 2012.
“When I initially choose the ETFs to invest in, it’s based on my risk profile first and then I’ll review what companies make up the fund,” Danielle Libatique, 28, a millennial investor and senior financial analyst at aviation company Wheels Up, told CNBC in a recent interview. Libatique currently has around $2,000 invested in the micro-investing app Acorns.
“One of my funds involves over 100 holdings, but I have reviewed the list to make sure that there aren’t any glaring companies that I would not want to invest in due to social impact,” she said.
Still, there are questions about how fully aware young investors are about where and how their money is being allocated — particularly as apps like Stash and Acorns effectively sweep spare change into ETF investments.
“Some robo-investing apps give you an overview of sector,” said Libatique. “But you have to dig deeper to review the exact holdings within those funds.”
Stash has attempted to make investing simple by renaming ETFs within the app, in an appeal to an investor’s personal interests. For example, the iShares U.S. Aerospace & Defense ETF is renamed “Defending America” and the ETFMG Video Game Tech ETF is renamed “Gamers FTW”.
In some cases, funds may hold assets that socially-conscious investors may find unpalatable, experts say. However, by foreclosing on certain sectors or activities, socially responsible investors could undermine their own portfolio, which experts recommend diversifying across a range of assets and industries, some say.
“It’s limiting to have a perfect socially responsible ETF or portfolio,” said Doug Boneparth, a financial advisor at Bone Fide Wealth. “Cutting out entire industries and removing portfolio diversity can hurt performance.”
While there have been isolated controversies related to whether some socially responsible financial instruments live up to their ideals, the current system relies on the apps users’ accountability and decision to access the resources offered by micro investing apps to educate themselves.
Investors have the freedom to view their portfolio holdings, while content related to socially responsible investing in general is also provided.
“An important point is transparency, but everyone has different views and different beliefs,” said Krieg. “Some people come here wanting to buy ‘Defending America’, others want to buy ‘Do the Right Thing’ and it is not my role to tell people what to do.”