Investment managers and financial advisor firms have long contended with the challenges of marketing to individual investors with significantly different financial profiles and objectives. Clients vary widely in terms of the size of their portfolios, their risk tolerance, their tax situations and whether they’re at an age when they’re building wealth or trying to conserve assets and generate retirement income.
Now a Stanford University study has underscored the extent to which ESG investing has added another layer of complication in conversations with individual investors – sharp differences in personal values and political orientation across age groups. The Stanford study found:
- 70% of young investors (41 years and younger) say they’re highly concerned about environmental issues, versus only 35% of investors 58-years-old and older.
- Two thirds of young investors are highly concerned about social issues, such as workplace diversity and income inequality. 70% of older investors say they have little or no concern about these issues.
- Younger investors say they are okay with foregoing 6% to 10% of their retirement savings returns to support ESG causes. Older investors do not want to give up any returns.
- Younger investors are more optimistic about future investment returns than older ones. Asked to forecast the average annual market return over the next 10 years, millennials and Gen Z estimated 17%, and Gen X respondents said 15%. Baby Boomers were more pessimistic, forecasting 5% average annual market return over the next decade.
What risk do these generational differences pose for asset management and financial advisor brands? The obvious one is that leaning too heavily on ESG themes to draw in younger investors will turn off older clients who typically have much higher levels of investable assets than people in their 30s or 40s. Or, conversely, failure to sufficiently address ESG-related concerns will not attract younger investors just starting to save for retirement.
Significant strategic issues arise from these generation gaps. Asset managers and wealth advisors are keenly aware that a huge generational wealth transfer is under way. The global consulting firm EY figures that Gen Z and millennials in the US alone could receive $30 trillion over the next 20 years. This unprecedented generational wealth transfer is why asset managers and financial advisors are focused on engaging with this next generation of investors, who on average are far more attuned than older clients to climate and social justice issues.
RF|Binder believes that the market for ESG investment products principles has reached an important inflection point as asset managers and financial advisors try to navigate widening generation gaps, increasing politicization and evolving regulation. In our view, the fund managers and asset managers that stand out as well-positioned in this challenging environment lean into three important messaging strategies:
1. Emphasizing specific long-term market opportunities arising from the flow of capital into sustainable solutions while tempering emotional appeals to personal values.
Both the professional and retail market has become far more sophisticated – and skeptical – about ESG investing, as reflected increasing in financial media coverage. As a result, value-laden appeals such as “doing well while doing good” or “saving the planet” are now often met with shrugs or doubts. These appeals can be seen by older investors as pandering to an audience to which they do not belong, and by younger ones as marketing hype not supported by what’s in the portfolio. High-minded language can also reinforce suspicions that ESG strategies are “concessionary” – that investors should accept lower returns in exchange for doing their bit for the climate and society.
As a result, some of the most effective messaging by asset managers and financial advisors these days focuses on highlighting specific carbon-mitigation or environmental activities within sectors or categories of companies, and then explicitly linking these activities to potential for higher returns. This messaging often takes the form of identifying specific companies that stand to benefit from the flow of capital into solutions spurred by new government spending, regulatory changes, or emerging competitive factors.
Some advisor and investment managers are tracking in specific terms the impact of the more than $370 billion set aside in last year’s Inflation Reduction Act to spur domestic manufacturing of clean energy and to lower greenhouse gas emissions through a variety of tax incentives. Emphasizing these drivers of financial performance and future returns is a message that resonates across all investors, young and old.
2. Stressing risk management.
Effective risk management is a concept that investors of all stripes and ages can appreciate as an important factor in long-term returns. Some of the most effective messaging in the ESG space these days leads with value of ESG analytics in helping managers accurately value companies on potential risks as well as potential returns.
Risk management messaging is often used by fund managers whose broadly invested portfolios don’t exclude sectors such as oil and gas, but are based on finding “best-in-class” companies within sectors in terms of ESG metrics. The theme is that the value of ESG analysis often lies less in the impact on financial reporting line than in the insights it can provide into how a company is managed.
3. Making more judicious use of ESG as a product marketing term.
ESG has long had critics who questioned the value of the concept as an analytical framework for investing. The lack of consistency and coherence in ESG rating regimes and the benchmarks built off their data has provided much grist for skepticism over the last few years. Compounding the issue are those regulatory anti-greenwashing initiatives. Both in the EU and the US, the term ESG is morphing into a regulatory definition with significant implications for marketers’ use of the term.
As a result, “to ESG or not to ESG” has emerged as a question for marketers. “Sustainability” is increasingly more likely to be used to communicate strategies’ objectives than ESG, with its broader set of concerns. Other, more dated expressions such as “responsible investing” may see a return to favor in this environment.