No-one is more skint than millennials. What they’re not haemorrhaging in rent, they’re squandering on avocados. Or so the story goes. That narrative means millennials are easy to overlook as potential investors – after all, how can they invest in assets they don’t have?
But there’s more to it than that. At the risk of being indelicate, baby boomers won’t live forever. In the coming years, there’s likely to be a hefty intergenerational transfer in wealth from the baby boomer demographic to millennial family members. Research from Ernst and Young suggests this wealth transfer could exceed $30 trillion.
That’s a sizeable collective nest egg. And when the time comes to invest, what factors will this demographic be thinking about? Well, we already know that environmental, social and governance (ESG) issues are important to today’s young people. A survey by Morgan Stanley survey found that 84% of millennials see ESG investing as a central goal. This suggests that, as young people become asset-rich, the pressure on companies to be transparent and adhere to ESG standards will intensify.
When activism collides with investment
Young people embracing social activism is nothing new. US students opposed the Vietnam War in the 1960s, while their UK peers marched in favour of nuclear disarmament. The difference today is social media and the extent to which young people have learnt to harness it to highlight social causes – and demand better corporate behaviour. These learned behaviours will stand them in good stead when they turn their attention to investing.
A drive for transparency and better standards would affect not just companies (as potential portfolio holdings), but asset owners and asset managers too. On the plus side, technology combining big data and algorithms has improved transparency hugely. One ESG ratings provider (which assesses companies and calculates an overall ESG rating) uses over 1000 data points spanning 6400 companies.
Focusing on what matters
It’s clear that people who allocate assets have access to better data than ever before. But ESG data is not without its flaws. A recent paper by the Harvard Kennedy School identified inconsistencies in how the factors determining companies’ ESG scores are created and measured. The problem lies in the social (S) element of the ESG score – which researchers deemed to be “the weakest link in the ESG chain”.
The social factor examines how well a company manages risks related to people and society. At the risk of being simplistic, the social factor considers how well the company treats its own people, plus the people who live in the communities where the business operates. Workers’ rights feature heavily – as do human rights.
When it comes to measuring human rights, there’s a global, authoritative standard – represented by the UN Guiding Principles. Crucially, these measures capture the human rights issues investors care about. And they’ve been widely adopted by governments – and even FIFA.
But Harvard Kennedy’s research suggests that these ‘gold standards’ for human rights are often “ignored or applied haphazardly” by data providers calculating ESG scores. That’s a bit of a problem for the future – and one we should probably address, before the millennials of today become the corporate activists of tomorrow.
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