How Millennials and Gen Z Are Driving Growth Behind ESG

Generation Z, people born between 1995-2010 and more commonly referred to as Gen Z, are the first generation to be digital natives as a world without the internet, mobility and apps, and social networks is not something they have ever experienced. In the U.S., Gen Z accounts for roughly 21% of the population while on a global basis they account for 26% of the population, equating to some 2 billion people. The size of this cohort makes it one to watch. Case in point, a recent survey by asset management firm Amundi and the Business Times found that 82% of Gen Z and close to two-thirds of young millennial investors have exposure to Environmental, Social and Governance (ESG) investments.

Combined, Gen Z and Millennials account for 43% and 49% of the U.S. and global population, respectively. Not only are millennials the largest workforce in U.S. history but together with Gen Z, they are poised to be on the receiving end of a wealth transfer as big as tens of trillions of dollars. This means their attitudes, values beliefs and risk tolerance are likely to shape their investment strategies.

So, what does the data tell us about those values and strategies? Let’s look:

• For Gen Z, consumption means having access to products or services, not necessarily owning them. Think Uber (UBER), Lyft (LYFT) and any streaming service vs. owning records, CDs and DVDs.
• According to a recent study, Gen Z shoppers demand sustainable retail. The majority of Generation Z shoppers prefer to buy sustainable brands, and most are willing to spend 10% more on sustainable products. Why? Because three-quarters of Gen Z consumers state that sustainability is more important to them than brand names.
• According to Nielsen, 75% of Millennials are eco-conscious to the point of changing their buying habits to favor environmentally-friendly products.
• A Pew Research Center survey finds Millennials and Gen Z stand out for their high levels of engagement with the issue of climate change.
• 90% of Millennials are interested in pursuing sustainable investments
• One-third of millennials often or exclusively use investment products that take ESG factors into account 19% of Gen Z, 16% of Gen X and 2% of baby boomers.

Millennials already played a significant role in ESG investing having contributed $51.1 billion to sustainable funds in 2020 compared with less than $5 billion in 2015. In 2021, investors poured $69.2 billion into ESG funds, unsurprisingly setting a new record, according to Morningstar.  This trend is only set to continue, particularly as more wealth transfers to them. And with 40% of Gen Z saying their investments decisions are driven by “companies with a purpose” as their expected income rises, by some accounts as much as 140% in the next five years, the outlook for sustainable investing looks rather bright. By 2025, it is expected that around 33% of all global assets under management would have ESG mandates. The longer-term view offered by the International Institute for Sustainable Development sees the market for ESG-mandated investments reaching $160 trillion by 2036, up from $30 trillion in 2018.

Typically, when we see forecasts like that, we see a flood of company interest looking to tap that growth curve, and this was no exception. By mid-2022, there were more than 550 ESG mutual and exchange-traded funds available to U.S. investors, up from just over 200 in 2017, with assets near $300 billion. To be clear, not all of these are new funds, and nearly 100 mutual funds and ETFs have been revamped with an ESG tilt. The combination of investor demand and growing access led to 34% of financial advisors using ESG funds with clients in 2021, according to the Financial Planning Association.

The pivot toward sustainable investing, however, has also led to greenwashing, which is when “a company purports to be environmentally conscious for marketing purposes but actually isn’t making any notable sustainability efforts.” Simply put, much of what passes as ESG is more sizzle than steak or more marketing mush than substantive sustainability. This has led to skepticism on the part of consumers and investors when it comes to companies as well as investment products that claim to have sustainable practices. It’s attracted interest from securities regulators as well, which are looking to instill new rules and guidelines as to what constitutes an ESG investment product. One SEC proposal “would require any fund that calls itself 'socially responsible,' 'sustainable,' or 'green' to invest 80 percent of its assets in ways that are consistent with that strategy.”

Given the values and beliefs of Gen Z and millennials, odds are they will heed the advice the SEC put forth in an Investor Bulletin on ESG funds: “If you are considering investing in an ESG Fund, you should know that all ESG Funds are not the same. It is always important to understand what you are investing in, and to be sure a fund, or any other investment, will help you achieve your investment goals.”

As that happens and should the SEC codify a set of rules and guidelines, investors of all ages and sizes are likely to see would-be ESG contenders and pretenders fall to the wayside leaving more sustainable focused funds in their wake.

Famed investor Peter Lynch summed it up rather nicely when he advised Investors to "know what you own and know why you own it." What is interesting to us about Gen Z Is that for now at least, as a group, they seem more interested in the "why" than the "what." Given the size of this cohort, it may be the catalyst pushing companies and Investment product issuers to take serious steps to Implementing ESG policies. As with many things, only time will tell.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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