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When Hannah Cohen invests in a stock or fund, she pays attention to whether the mission aligns with her personal values.
For example, the 25-year-old data consultant has invested in funds such as the ALPS Clean Energy ETF and the Global X Autonomous and Electric Vehicles ETF as someone who cares about climate change. In the same vein, major oil stocks are largely ruled out.
“It sends the message that people are interested and that people do care,” Cohen said. “I don’t know how much of a difference I make as an individual, but I do think it’s important to at least play a part and show that I’m physically, but also emotionally, involved in these goals.”
What young investors want
Recent survey data shows that Cohen is not alone. Nearly two-thirds of Gen Z investors want to allocate their portfolios to support the causes they care about, according to a July survey of some 4,000 current and aspiring investors by the US Bank.
That compares to 59% of millennials, 45% of Gen X and 30% of boomers.
And active young investors are willing to sacrifice returns to achieve that goal. The survey found that more than four-fifths of Gen Z and millennials would be willing to underachieve S&P500‘s 10-year average return of 12% to ensure that the companies they invest in align with their beliefs. Only 73% of Generation X and 65% of Baby Boomers said the same.
Nearly a fifth of Gen Z investors said they would accept returns between 9% and 11.8%, rather than the full 12% average return. Nearly 30% would like between 6% and 8.9%, while another 30% would accept returns between 3% and 5.9%.
Matthew Ivler, a 23-year-old machine learning engineer, began his investment journey in March 2020, shortly after the pandemic led to a market crash. Initially, he focused his portfolio primarily on individual stocks and focused more on receiving consistent dividends than growth. Now his portfolio is largely made up of exchange-traded funds – which has also changed the way he aligns his investment strategies with his values.
“Of [ETFs], I’m like, ‘Yeah, this is going to follow the market.’ But in the end I end up investing in all of these companies, and some of them are probably doing things that I don’t agree with,” Ivler said. ‘But I choose one share [one] I think it’s fundamental.”
He quoted DIY store as one of his original assets that he later sold after controversy surrounding the company’s donations to federal lawmakers who objected to the results of the 2020 presidential election. Chevron was also part of his portfolio when he first started investing, but later reduced exposure to it in favor of alternative energy companies as he became more climate conscious.
His portfolio now includes names like Edison Internationalwhich deals with sustainable energy solutions, as well as the Invesco Water Resources ETF, which focuses on utilities that help save and purify water. Ivler’s return on his investments since the start of the year stands at around 9.5%, while the S&P500 has risen nearly 15% over the same period.
Sending a ‘signal’
The US Bank investigation builds on previous data pointing in a similar direction. Younger and wealthier investors were more likely to support environmental, social and corporate governance (or ESG) issues and put returns at stake, according to a study by the Stanford Graduate School of Business, the Rock Center for Corporate Governance and New York University put for those values. Hoover Institution came out late last year.
The data comes at a time when accountability metrics and standards for ESG investing are hotly debated. President Joe Biden used his first veto in March to salvage a U.S. Department of Labor rule around investing in ESG funds that many Republicans wanted gone. Lawmakers in Washington have continued to squabble over ESG reporting mandates for companies.
A broad behavioral phenomenon for the relationship between age and ESG may be that young adults naturally seek ways to express their identity, said Julie O’Brien, head of behavioral sciences at US Bank.
Investing can give young adults another way to say, “This is the kind of person I am, and now I get to act in a way that aligns with my identity,” O’Brien said. “What we see in ESG investing is that it creates something that you can signal to other people.”
O’Brien also said younger generations may feel more connected to ESG given the increased amount of information available and the ubiquity of social media.
‘Has to be done’
Certainly, attitudes towards socially conscious investing vary when looking at different identifying factors within age groups. Among active investors, the US Bank found that Hispanic and Black investors were significantly more likely to feel motivated to use investing as a means to support causes they care about.
Dylan Assi said that being a visible minority makes it harder to ignore ESG issues in personal investing. The 22-year-old, a passive investor who first encountered ESG in college, said it can be obvious when a company is “putting its money where its mouth is”.
“There’s a clear problem we have on the environmental side, but also on the social side,” said Assi, who works in private equity and real estate investing. “Basically, doing the right thing is something that needs to be done.”
Assi said he has discovered a misconception among young co-investors that they must underperform the broader market to appease personal values. Rather than looking for companies that seem “perfect” on all fronts, he said we should look more broadly at companies that support ESG trends. He pointed to Apple And Microsoft‘s work on sustainability in the cloud as an example.
Cohen, whose portfolio is up some 35% this year, agrees that investors don’t necessarily have to sacrifice profits to make socially conscious decisions. But she said it can be challenging to find reliable research on how companies score on ESG without access to expensive screening software. It’s even harder if you look for companies that do work in the social or corporate governance fields, she added.
Assi said he usually looks at publicly available ESG reports, but acknowledges the possibility of bias as they are typically written by the companies themselves. On the other hand, Ivler said he doesn’t actively seek a company’s ESG reports, but will look to the general news for insight into a company’s actions.
Despite obstacles, O’Brien believes that having an ESG focus in investing ultimately benefits young investors in achieving their financial goals. It makes investing more concrete and tangible, she said, which is especially important as young people struggle with uncertainty and an abstract future.
“We often forget that investing isn’t just money and math,” she says. “It’s psychology and things inherently ingrained in our humanity that we have to navigate around.”