Evolution Of Values: ESG

Compared to prior generations, millennials tend to think more about social responsibility in areas such as workplace equality and climate change, and they are also more globally minded. Baby boomers were also concerned about social issues, but millennials are willing to use their money more generously to promote social causes. A Morgan Stanley study found millennials are the most interested in sustainable investing (84 percent vs. total average of 71 percent) and are nearly twice as likely to buy investments targeting specific social or environmental outcomes (22 percent vs. total average of 12 percent).

While millennials may be interested in sustainable investing, the study found approximately 54 percent believe sustainability and financial gains are trade-offs. But there has been an evolution within values-based investing that may not be fully realized. Let’s quickly review socially responsible investing (SRI) vs. environmental, social, and governance (ESG):

  • SRI is the “old school” or “traditional” values-based investing strategy. It is referred to as exclusionary screening because the methodology excludes stocks from an index. These are typically “sin stocks,” such as those in the tobacco, alcohol and firearms industries.

  • ESG is the “new school” values-based investing strategy. It is referred to as inclusionary screening because the methodology includes companies that exhibit favorable traits, including:

  • Environmental — reducing fossil footprint, managing resources wisely, etc.

  • Social — respecting human rights and culture, promoting workplace equality and product safety, etc.

  • Governance — stewardship for shareholders, being transparent and accountable, etc.

While SRI is associated with paying more to screen stocks without offering any particular benefit to potential returns, ESG acts more like a risk factor with proven historic returns. Specifically, the ESG strategy acts as a component of the quality factor. It includes more stable and profitable companies, which should perform better over time and are better able to weather market downturns and avoid lawsuits from financial and environmental wrongdoing.

Similar to ETFs, the popularity of ESG can be seen in the growth in assets. There has been consistent growth over the last decade and particularly strong 33 percent growth since 2014, according to The Forum of Sustainable and Responsible Investment.