Sustainable investment joins the mainstream

IN 2008, when she was in her mid-20s and sitting on a $500m inheritance, Liesel Pritzker Simmons asked her bankers about “impact investing”. They fobbed her off. “They didn’t understand what I meant and offered to screen out tobacco,” recalls the Hyatt Hotels descendant, philanthropist and former child film star. So she fired her bankers and advisers and set up her own family office, Blue Haven Initiative. It seeks investments that both offer market-rate returns and have a positive impact on society and the environment. “Financially it’s sensible risk mitigation,” she says. “Our philanthropy becomes far more efficient if we don’t need to undo damage done in our investment management.”

Such ideas are gaining ground, particularly among the young. Fans of “socially responsible investment” (SRI) hope that millennials, the generation born in the 1980s and 1990s, will drag these concepts into the investment mainstream. SRI is a broad-brush term, that can be used to cover everything from divestment from companies seen as doing harm, to limiting investment to companies that do measurable good (impact investing). The US Forum for Sustainable and Responsible Investment, a lobby group, estimates that more than a fifth ($8.7trn) of the funds under professional management in America is screened on SRI criteria, broadly defined, up from a ninth in 2012 (see chart).

Growing demand has spurred Wall Street into action. Goldman Sachs now manages $10.5bn in assets dedicated to “ESG” (ie, meeting environmental, social and governance criteria) and a further $70bn in “negatively screened” assets that exclude the manifestly unvirtuous. TPG, a private-equity giant, last month raised a record $2bn impact-investing fund, with the help of Bono, a rock-star do-gooder.

The young are SRI’s big hope. In the coming decades, they will inherit pots of money. Unlike many of their baby-boomer parents, they believe in sustainable investing. There may not be much evidence to support claims that SRI outperforms the market, but there is enough to show it can match it. Having grown up in a digital age, millennials are both more exposed to the world’s woes, and more likely to use electronic investment tools. Amit Bouri of the Global Impact Investment Network, an industry forum, says more and more banks are contacting it “because clients demand these impact options”. Julia Balandina Jaquier, a family adviser in Zurich, says that “boomers see doing good as separate from investing; whereas millennials don’t see how you could possibly separate the two.”

This generational change is already visible at universities. Under pressure from alumni, several endowments have promised to clean up their investment portfolios. Business schools say classes related to ESG investment are oversubscribed. In the 1990s you might have been seen as “going soft”, says Matt Bannick from Omidyar Network, an impact-investment firm, but today over half of applications to Stanford Graduate School of Business mention the school’s efforts to alleviate poverty in developing countries.

The ultra-rich have been leading the way. A group of millennials, including a Ford, a Rockefeller and Mrs Pritzker Simmons, in 2015 launched “The ImPact”, a network pledging to“create measurable social benefit” through its investments. Presented as their generation’s answer to the “giving pledge” launched in 2010 by Bill Gates and Warren Buffett, it has over 125 signatories (with average wealth of around $700m). Similar initiatives are springing up elsewhere.

But it is not just billionaires who are flexing their muscles. The average millennial is famously worse off than his parents, but the oldest are nearing peak-earning capacity; and in the coming decades boomers will pass on trillions of dollars in the largest intergenerational wealth transfer ever. By 2020 millennials may control up to $24trn, estimates Deloitte, a consultancy. Few will enjoy the lavish retirement guarantees their parents had. They are expected to be vocal about how their pension contributions are invested.

Having experienced the financial crisis, millennials are suspicious of financial institutions. They also believe they can change the world. According to a survey in America by Morgan Stanley, 75% agreed that their investments could influence climate change, compared with 58% of the overall population. They are also twice as likely as investors in general to check product packaging or invest in companies that espouse social or environmental objectives. And, like children of every generation, they influence their parents. “We see a lot more patriarchs or matriarchs coming in with the kids asking ‘what’s the impact of this portfolio?’” says Audrey Choi from Morgan Stanley.

Millennials tend to balk at off-the-shelf products. They “want to express individual values,” says Josh Levin, a co-founder of OpenInvest, a robo-adviser that lets people “swipe” issues into or out of their portfolio—ditching shares in fossil-fuel producers, say, or buying more in ones with good records on LGBTQ rights. (Politics also comes into play: one option is to dump shares in firms allied to President Donald Trump.)

Such technology can slash costs, helping bring SRI to ordinary investors. Improved computing power also makes it easier to assess a company’s harmful—or beneficial—impact, as more company data become available thanks to voluntary and statutory reporting initiatives. Two decades ago even the most basic data on, say, corporate pollution were unobtainable. Today 12 stock exchanges require listed companies to disclose ESG information; EU legislation mandates similar disclosure from pension funds; rating agencies rank companies.

Arabesque, a “quant” asset manager that uses ESG data, examines the sustainability of over 7,000 of the world’s largest listed companies. Its technology combines over 200 ESG measures with other data points (such as news stories from 50,000 sources) to rank companies. Early adopters include Deutsche Bank and S&P Indices. Andreas Feiner, Arabesque’s head of ESG, thinks recent corporate scandals, such as the “dieselgate” scandal at Volkswagen, boosted responsible investing. Volkswagen shares had long been filtered out by its algorithms because of low corporate-governance scores.

Money managers’ deepening love affair with sustainable investment stems not from warm, fuzzy ideas about doing good. For most it is a commercial choice. That worries some SRI purists, who fear that “mainstreaming” will lead some fund managers to put an ethical gloss on conventional investments. But most in the field argue that what social investing needs is the momentum that accompanies big infusions of capital. Financial firms can provide both money and the resources to professionalise the field further. And money managers who pay only lip-service to SRI are unlikely to get away with it for long: sooner or later the robots and millennials are bound to call them out.