Generational wealth transfer set to transform investment landscape

By Rudesh Patel, Head of Sustainable Investing at Sanlam Investments Multi-Manager

The world stands on the brink of a massive generational wealth transfer, poised to fundamentally reshape the investment landscape. As millennials (born 1981-1996) and Gen Z start to inherit trillions, their distinct values and priorities are already influencing financial markets. This shift, driven by their increasing spending power and entrepreneurial spirit, is steering investments towards more socially and environmentally conscious avenues.

Millennials leading the charge in sustainable investing

Millennials, now the largest adult cohort worldwide with approximately 1.8 billion individuals representing 23% of the global population, are at the forefront of this change. Online news provider Quartz recently reported that millennials are about to become the wealthiest generation ever, which could ‘turn the investing world upside down’. In the US alone, Boomers and the Silent Generation are set to hand over approximately US$90 trillion in assets to millennials over the next decade, according to Knight Frank. This will make millennials the richest generation in history, according to the report.

Given that about 80% of the millennials surveyed by Knight Frank said they’re trying to minimise their carbon footprint, sustainable investing strategies will likely be top of mind, changing the investing landscape for the long term. Bank of America’s 2022 survey uncovered similar findings, revealing three-quarters of US millennials want to invest in sustainable products and ventures. A US Bank survey found four-fifths of millennial and Gen Z investors were willing to underperform the S&P 500’s 10-year average return of 12% if this meant ensuring their investments aligned with their beliefs.

Similarly, in its 2024 Gen Z and Millennial Survey, Deloitte found environmental sustainability remains a top priority for both younger generations, with 59% of millennials stating they’ve worried about climate change in the last month. 81% of surveyed millennials also said they believe the business sector should do more to empower consumers to make sustainable purchasing decisions.

Julie O’Brien, the Head of Behavioural Science at the US Bank suggested younger generations are increasingly using their investing strategies as a means of expressing individual identity. She posits that their interest in ESG probably also arises from being digital natives and the omnipotence of social media.

Growing importance of ESG investing

The preference for sustainable investing is not confined to the United States. The Global Sustainable Investment Review (2022) found sustainable investments under management (AUM) in non-US markets increased by 20% from 2020 to 2022.

The same report found that despite big regulatory and methodology shifts, sustainable investing remained a major global capital market-shaping force, with the industry maturing significantly, by working toward a transparent standard of practice.

According to the latest Morgan Stanley Sustainable Signals survey, 77% of individual investors are interested in sustainable investing. The survey polled 2,820 active individual investors across the US, European & Japanese regions. In Europe, interest in sustainable investing is similar to the US at 85%, and millennials (97%). European respondents were also found to be the most likely to consider climate change when investing in traditional companies. While Japan’s interest was slightly lower, more than half of investors are still interested (56%).

Changing dynamics across generations

Contrary to popular belief, millennials (USA-based study) are earning more than any other generation at their age, as reported by the US Census Bureau in 2021.

A Morgan Stanley study underscores millennials’ commitment to sustainability, revealing that they are nearly twice as likely to invest in funds or companies targeting specific social or environmental outcomes compared to older investors. Additionally, according to research from EY:

• 29% of investors in their 20s and 30s said they seek a financial adviser that provides values-based investing; millennials ranked this priority third in a list of nine identified priorities.
• 17% of millennials indicated they seek to invest in companies that use high-quality ESG practices, compared with 9% of non-millennial investors.
• 15% of millennials said they would exit an investment position due to objectionable firm activity, compared with 7% of non-millennial investors.
• 15% of millennials indicated they would rather purchase products from a sustainable brand, compared with 7% of non-millennial investors.

Impact on asset managers and financial advisers

This generational shift presents both opportunities and challenges for asset managers and financial advisers. The new wave of investors is seeking products and solutions that align with their values, including environmental, social, and governance (ESG) factors. As a result, asset managers must adapt by offering innovative ESG solutions that resonate with the ethical considerations of younger investors.

Global sustainable investing has surged, with assets under management increasing from US$22.8 trillion in 2016 to US$30.3 trillion in 2022, according to the Global Sustainable Investment Alliance (GSIA). This growth underscores the rising demand for sustainable investment options and the evolving investment strategies tailored to these preferences.

The Global Sustainable Investment Review (2022) forecasts an increasing rise in the range of available sustainable funds as asset managers try to meet growing investor demand for investment choices aligning with their sustainability values. The report found retail investors are increasingly knowledgeable and concerned about how their investments impact the world. Invesco, for example, found that 79% of surveyed investors (2021) said sustainability was important to how they invest; 95% of under-45s said they wanted their money to be invested responsibly.

A case study in sustainable investment

A prime example of how asset managers are adapting to these new priorities is the Sanlam Living Planet Fund. Launched by Sanlam Investments in collaboration with the World Wide Fund for Nature (WWF), the fund is designed to align with the sustainability values that millennials and Gen Z prioritise. It focuses on investing in companies that demonstrate strong environmental, social, and governance (ESG) practices. This includes companies that actively work to reduce their carbon footprint, promote social equity, and maintain robust governance structures.

The Sanlam Living Planet Fund is not just about avoiding negative impacts; it actively seeks to create positive change. It invests in renewable energy projects, sustainable agriculture, and companies that are leading the way in corporate social responsibility. This proactive approach resonates with millennials, who are known for their desire to make a tangible difference through their investments.

Why funds focussed on sustainability are a good match for millennials:

Several factors make these funds particularly appealing to millennial investors:

1. Transparency and accountability: Millennials demand transparency in how their money is being used. These funds provide detailed reports on their investments and their impact, ensuring investors can see the real-world effects of their investments.
2. Alignment with personal values: Many millennials prioritise sustainability and ethical considerations in their daily lives. By investing in these funds, they can ensure their investment choices reflect these values.
3. Long-term growth potential: Sustainable investments are increasingly being recognised not just for their ethical value, but also for their financial potential. Companies with strong ESG practices are often better positioned for long-term growth, making these funds an attractive option for future-focused investors.
4. Active engagement: The fund managers of the Living Planet Fund actively engage with the companies they invest in to promote better ESG practices. This means investors are not just passively contributing to change but are part of a dynamic process of pushing for improvement.

The future of sustainable investing

The sustainable investment universe is still in its early stages, but the potential for growth is immense. As millennials and Gen Z continue to enter the investment market, the demand for products that align with their values will likely drive the development of new financial solutions. This generational shift could act as a catalyst for ESG investing to reach unprecedented levels of demand.

Meeting the evolving needs of future investors not only presents a significant opportunity for financial institutions but also challenges them to innovate and rebuild trust with a new generation of clients. The market growth in sustainable investing, driven by demographic changes and macroeconomic trends, will continue to shape the future of finance. As BlackRock CEO Larry Fink aptly states, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”

Disclosure

Sanlam Multi Manager International (Pty) Ltd is approved as a Discretionary Financial Service Provider in terms of the Financial Advisory and Intermediary Services Act, 2002.

Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI”), Satrix Managers (RF) (Pty) Ltd, Graviton Wealth Management (Pty) Ltd (“GWM”), Graviton Financial Partners (Pty) Ltd (“GFP”), Satrix Investments (Pty) Ltd, Amplify Investment Partners (Pty) Ltd (“Amplify”), Sanlam Africa Real Estate Advisor Pty Ltd (“SAREA”), Simeka Wealth (Pty) Ltd, Absa Asset Management (Pty) Ltd (“ABAM”) and Absa Alternative Asset Management (Pty) Ltd (“AAM”); and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF) (Pty) Ltd (“SCI”), Satrix Managers (RF) (Pty) Ltd (“Satrix”) and Absa Fund Managers (RF) (Pty) Ltd. Sanlam is a full member of ASISA. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments/collective investment units/unit trusts may go down as well as up.

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