Building a Portfolio

A Look at Impact Investing across Generations

As baby boomers retire and millennials gain wealth, many in the financial industry are trying to anticipate the movement toward impact investing across generations. Research shows that all generations are increasing their interest in impact investing, but younger groups like millennials are more focused on how their portfolios affect the world. They’re also more likely to insist that their investments align with their values.

The Pew Research Center defines millennials as those born between 1981 and 1996, Generation X as those born between 1965 and 1980, and baby boomers as those born between 1946 and 1964. These divisions reflect more than individuals’ age or life stage. They speak to each generation’s collective identity as they confront formative experiences as a group, including how they see their money in the context of the wider world.

Measuring Impact Investing across Generations

While 37% of all high-net-worth (HNW) investors have reviewed their portfolio for impact, that percentage doubles for millennial investors, according to a 2018 report by US Trust. The report found that 78% of HNW millennials had reviewed their portfolio for impact, compared to 63% of Gen Xers and 28% of boomers.

A separate study by Crossmark Global Investments saw an even greater contrast between generations. That report found that 40% of investors over the age of 60 are familiar with “values-based investing,” while 84% of millennials investors are informed about the subject. Results are similar or more stark for related terms like “responsible investing” (47% vs. 90%), “socially responsible investing” (37% vs. 87%), and “ESG investing” (6% vs. 80%).

Those disparities aside, US Trust found that all three generations showed an increase in the percentage of HNW investors who reviewed their portfolios for impact from 2015 to 2018. A report from Investment News and Calvert Research and Management also noted interest in ESG factors across all generations and suggested that advisers might underestimate interest in impact investing among their nonmillennial clients.

Still, millennials remain the most willing to move their accounts in order to get access to more socially responsible investment options. TD Ameritrade found that almost half of millennials would switch firms, compared to 30% of investors overall.

Millennials remain the most willing to make changes to their investments in order to ensure a more impactful portfolio.

Tracking Priorities

Even within impact investing, members of different generations tend toward varying priorities. Across all age groups except millennials, healthcare/disease prevention and cures represented the most important area for investments in a 2018 survey by American Century Investments. The top-ranked area for millennials in that survey was improved education, cited by 29% of millennials and just 12% of baby boomers.

Meanwhile, the TD Ameritrade survey found that environmental impact was a more popular value among millennials, whereas human rights, religious beliefs, and diversity ranked more highly with boomers. Commenting on the survey, TD Ameritrade’s managing director of investment products and guidance Lule Demmissie also noted that impact investing strategies differ between the two groups. Millennials target investments in companies and initiatives proactively working to improve the world, while boomers are more likely to use screening to exclude or include certain industries from their portfolios.

These priorities may reflect the different cultural drivers, education, and background of each group, as well as their overall approach to investing. For example, after decades of investing, many boomers are now nearing retirement and have developed a keen focus on generating returns for financial stability in their golden years. That concentration means they’re likely to keep gravitating toward impact investing only if research continues to prove that impact investing can bring market-rate returns.

The American Century survey showed that millennials are concerned about returns and risks, too. But a number of other factors move them to invest from a different vantage point from their parents. The Investments & Wealth Institute suggests that a lack of trust in corporate brands, a technology-driven sense of global citizenship, and a socially conscious ethos, among other factors, have led millennials to impact investing. Overall, “[t]hey view their financial activity as an extension of who they are,” which changes the stakes when it comes to their portfolios.

Preparing for Generation Z

Embracing inclusivity and education have become hallmarks of the millennial generation. But in these areas, the postmillennial group known as Generation Z could go even further. While they’re still largely college-aged or younger, Generation Z is on track to become the most diverse and most educated generation in American history, according to Pew data.

As those within Gen Z reach adulthood, accumulate money, and enter the investing world, they’ll encounter the impact investments that millennials are already demanding. The diversity of the younger generation means they may be more likely to look for investments that reflect that diversity, whether via investing through a gender lens, supporting minority-owned businesses, or championing other underrepresented communities. Their education and reliance on technology and data will give them more tools to evaluate investments, both in terms of returns and impact. Considered together, millennials and Generation Z represent a powerful force that’s poised to move impact investing even more into the mainstream for retail investors.

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