ESG: The ‘Moral Compass’ Across the Investing Landscape

ESG: The ‘Moral Compass’ Across the Investing Landscape

April 26, 2022

Today, many people, especially younger generations like Millennials and Gen Z, want their investments to reflect the social and environmental goals they support. While there’s no single legal or regulatory definition of Environmental, Social and Governance (ESG) investing, it’s generally understood to have the goal of long-term performance and risk management, while promoting positive outcomes in the world outside of financial returns alone.

In my opinion, ESG investing is the moral compass that people use when deciding what companies to invest in. This notion of making money while trying to save the world at the same time may seem like a pipedream to some, but this seems to particularly resonate with the Millennial generation.

In fact, Millennials make up the largest generation in U.S. history with a population of approximately 72 million, according to a 2020 population estimate from the Pew Research Center. The Brookings Institution projects this group will account for more than 30% of all adult Americans by 2020, and as much as 75% of the workforce by 2025. By all accounts, as they reach their prime working and spending years, their impact on the economy will be huge.

In 2017, Morgan Stanley’s Institute for Sustainable Investing surveyed active individual investors and found that:

  • 86% of Millennials are interested in sustainable investing or investing in companies or funds that aim to generate market-rate financial returns, while also pursuing positive social and/or environmental impact.
  • Millennials are twice as likely as the overall investor population to invest in companies targeting social or environmental goals and believe that good ESG practices make better long-term investments.
  • 90% of them say they want sustainable investing as an option within their 401(k) plans.

As Baby Boomers age and begin to pass down money to their Gen X and Millennial descendants, it will be the largest intergenerational wealth transfer in history, with $30 trillion set to change hands over the next few decades.

Thus, if Millennials are already favorably inclined toward ESG investment practices, and as they grow their wealth through earnings and inheritance, it’s safe to assume that ESG investing will only continue to grow as part of the investing landscape.

Despite this expectancy for massive growth, recent regulations in the U.S. have put a damper on the prospects for ESG investing, especially as it relates to investing within qualified retirement plans like 401(k) plans. It remains to be seen as to whether this crack down on ESG regulation will reverse under the Biden Administration. Plus, there are still many pundits who believe ESG investing is just a marketing ploy or stock bubble, similar to the tech bubble of the early 2000s.

Regardless of which side the experts are on, it seems clear that ESG investing is here to stay.  Further, as the oversight and regulation for ESG investing becomes more transparent and standardized, it would appear this investment strategy is poised to become a juggernaut in the investment world. Based on this, it’s reasonable to assume the interest in ESG investing is neither a fad nor a short-term trend.

Could it be that Milton Friedman’s premise that companies should try to pursue profit above all else and in that pursuit will accomplish good as a consequence is being turned on its head? It certainly appears so, since ESG investing can no longer be categorized as the future of investing. It’s already a reality today.

This article originally appeared on the Dynamic Advisor Solutions blog.

This material has been distributed for information purposes only. All investments carry certain risk and there is no assurance that an investment will provide positive performance over any period of time. Because ESG criteria excludes some investments, ESG strategies may not be able to take advantage of the same opportunities or market trends as those that do not use such criteria.