In the last few years advocates of corporate social responsibility theory have been assuring everyone who would listen that a new day is dawning for financial management, and that younger investors would be increasingly demanding that public companies and investment management firms conduct business consistent with environmental, social, and governance (ESG) goals.
Analysts at Ernst & Young wrote in 2017 that “[d]emand for sustainable investments is being driven, in part, by millennials who prefer to invest in alignment with personal values,” and S&P Global went further earlier this year with an article titled “Move over Millennials: ESG Investing Is a Multigenerational Conversation,” suggesting that a youth-led wave of enthusiasm was broadening to the entire investor class. A new industry study, however, may be interrupting that narrative.
Marion Halftermeyer and Benjamin Stupples of Bloomberg reported this week on a study by UBS Group AG that suggests high net worth Millennial investors have relatively little interest in ESG and other varieties of “socially responsible” investing (SRI) per se, preferring a more traditional model of maximizing market returns and supporting their chosen social causes through direct philanthropy:
“Unlike what you hear, a next generation that is meant to be very green and very altruistic and very much anti-business, is actually very pro-business,” Josef Stadler, head of the global family office unit at UBS, said in an interview.
Billionaires will pass on more than $2 trillion of wealth within the next two decades, according to research by UBS and PwC. The world’s top wealth managers have been bolstering their offerings of green, sustainable and good governance investments -- known as ESG -- as studies from as recently as last year indicated that they would be more attractive to millennials taking over.
“We have learned this is not the case,” said Isadora Pereira, a UBS director and one of the report’s authors. “They are interested and they are engaged in impact and sustainable investing, but I just don’t think it’s this black-and-white, water-to-wine change that has been discussed.”
While many big money managers have signed on to ESG/SRI-themed campaigns and statements in recent years, including the United Nations’ Principles for Responsible Investment, the entire discipline has long been criticized for vagueness and lack of analytical rigor when it comes to defining what exactly counts as a socially responsible investment. Last year researchers at MIT’s Sloan School, for example, found that ESG rating firms agree less than two-thirds of the time (0.61 correlation) when evaluating whether firms are complying with ostensible ESG goals (credit ratings from Moody’s and Standard & Poor’s are correlated at 0.99).
Because of the fast-and-loose nature of ESG definitions and the procedural rather than substantive nature of compliance, advocates have been able to rack up statistics that seem very impressive and suggest that ESG investing in an inevitable market evolution. But when asked about whether they have an intention of leaving potential market gains on the table by elevating socially desirable investments over the best returns, enthusiasm begins to flag, as with the respondents in the UBS study. I suspect the next few years will see more cases of reality settling in, especially in the context of the post-coronavirus pandemic recovery.