Responsible investing is becoming increasingly more important for employees when deciding where to invest their money. This increase is especially noticeable among younger investors. For instance, in our recent research nearly 29% of millennials confirmed that responsible investing was of interest to them (1).
There are several different approaches that come under the umbrella of ‘responsible investing’ but Environmental, Social and Governance (ESG) is arguably what most employees mean when they think about how to invest their money.
ESG investing is about employees deciding where to invest their money based on a range of environmental, social and governance factors such as climate change, labour practices or even executive pay. The ultimate aim is to drive investment managers to include these factors when creating and managing investment funds.
But not if it means lower returns!
Although millennials are increasingly concerned about how and where their money is invested, they are not entirely altruistic. Returns are just as important, as demonstrated by our research, where nearly 33% of millennials feel that investment returns are more important!
The rise of ESG investing correlates with an increasing awareness of the detrimental impact our current way of living is having on the planet. The recent strikes around the world were really spearheaded by the younger generation; they are calling on both governments and companies to address climate change.
This pressure combined with greater awareness has led consumers, companies and governments to consider the impact of their activities and push for greener alternatives.
For instance, the impact of single-use plastic has led to many companies seeking sustainable, alternative solutions, including biodegradable packaging. The tax avoidance of several well-known companies - including Amazon and Apple - has led to increased public pressure for more fair and transparent systems.
And concern around climate change is not just about changing behaviour; it’s also about changing expectations. Traditional economic theory suggests that the purpose of any company is to increase shareholder value. Recently, however, several high-profile CEOs - including the CEO of J.P. Morgan - have suggested a new definition for company purpose, recognising responsibilities to customers, employees, suppliers and the environment as well as shareholders.
Millennials understand that their investments in pensions or ISAs can either drive more coal plants and fossil fueled economies, or power new technologies which create cleaner and ‘greener’ renewable energy. They want the latter!
For some people, investing in a socially responsible way goes hand in hand with lower returns. But the counter argument is that investment in companies that are not responding to climate change will ultimately produce much lower returns. For instance, increasing climate change related insurance claims will ultimately affect the profitability of large insurance firms. Fossil fuel companies and energy businesses will become less profitable as we transition to a low carbon economy. The next 30 years will inevitably change the way humans live, translating to big impacts on retirement prospects. For Millennials, who are likely to be saving for their pension for the next 40 to 50 years, the transition to a global, low-carbon economy is a significant trend which should be considered in their portfolio asset allocation and management by pension trustees.
The same also applies to savings opportunities. Anybody who has a pension or investment (also known as stocks and shares ISA), for example, is ultimately an investor as they are investing money. Allowing employees to invest this money responsibility not only allows them to align their pension and savings to their concerns, but also increases the likelihood of their longer-term needs being met in a sustainable manner. Offering ESG and responsible investment options to employees ultimately allows them to dictate their own future and leverage the power of their money.
Both pensions and responsible investment look towards the future: the former by investing for the long term to meet future needs, the latter to ensure we all have a sustainable and prosperous world to live in for both ourselves and successive generations. The opportunities which are available through leveraging the power of responsible investing are unequivocal. It has come down to the simple message that the more we are able to invest responsibly, the brighter the future looks.
Enabling employees to invest their money responsibly allows them to save for personal long-term financial goals in line with their own values, which means they’re likely to be more engaged with their savings. And engagement is often one of the biggest issues for employers when it comes to pensions and general savings in the UK.
Offering responsible investment options allows employees to feel good about their future while helping them make the most of their money.
If you’d like to make responsible investments available for your employees, get in touch.