The ($30 Trillion) Consumer Investing Opportunity
Demand for new investing approaches is growing, but funds may not be as clean as they seem.
The biggest wealth transfer in American history has already begun. Baby Boomers will be handing some $30 trillion down to their millennial children over the next few decades, and the financial world — everyone from Wall Street behemoths to newly-fledged startups — wants to help them figure out how to invest it.
The big millennial courtship is on, and, studies say, their biggest concern isn’t just big returns, but doing good as they invest. When Morgan Stanley conducted a 2015 survey, it found that 84 percent of millennials were interested in sustainable investing, and they were twice as likely as the normal population to exit an investment due to “objectionable activity.” An OppenheimerFunds study of millennials from families worth more than $35 million found that 69 percent were interested in socially responsible investing.
“It’s the same story with all of my peers,” says Rudy Rubio, a 30-year-old manager of strategic partnerships at Coursera, who just started investing for the first time via an SRI app called Grow. “We want to find pathways to invest in the most morally responsible way. It really makes sense, and it really makes a difference.”
Socially responsible investing isn’t a new phenomenon. In the United States, the practice goes back at least as far as the Quakers, and over the past few decades, firms like Calvert Investments, First Affirmative, and Domini Social Investments have made their names focusing their efforts on long-term performance and social and environmental impact.
But now, two factors are driving a new wave of interest — millennials and women, the latter of whom now control some $11.2 trillion in assets in the U.S.
In that same Morgan Stanley study, 76 percent of women reported that they believe environmental, social, and governance (ESG) factors are important when making an investment decision.
The demand for these types of investments is growing. Earlier this year, a Bloomberg investigation found that ethical investing has grown by 80 percent over the last five years, to $223 billion.
“These firms have been out there, and they’ve been growing,” says Vanessa Green, campaign director at DivestInvest Individual, a nonprofit that encourages individual investors to get out of fossil fuels and invest in climate solutions.
“What’s new is the speed at which people are becoming aware and active in this space.”
In 2013, Morgan Stanley created its Institute for Sustainable Investing. Recently, both Calvert Investments and First Affirmative were acquired by firms looking to expand into SRI offerings. And in the startup space, companies like Grow (Team Grow) and OpenInvest are putting values-based investing directly in the hands of consumers.
The tricky part about SRI, though, is that there are no definitive rules. Slapping a sustainable or ethical brand on a fund doesn’t necessarily mean that it totally excludes oil companies or tobacco giants, and a consumer’s idea of ethical enterprises might not match a fund manager’s.
“Historically, the ‘socially responsible’ in SRI has been more of a judgment call than a quantitative measured ratio,” says R. Paul Herman of HIP Investor, which developed its own ratings system to rank different types of investments for risk, potential return, and their impact on society (HIP translates to human impact + profit). “Plus, no company is perfect, but a mix of stronger and weaker characteristics.”
In a survey, Bloomberg discovered that six of the top 30 sustainable or ESG funds contain oil companies. “The demand for sustainable investments provides a huge opportunity for greenwashing,” Green says. “We’re already seeing it happening. There have been a couple of investment products that have emerged that are calling themselves fossil-free, but they still hold utilities that are primarily powered by fossil fuels.”
To make it easier for consumers to understand what exactly is in their portfolios, the shareholder advocacy group As You Sow has developed a website, fossilfreefunds.org, that flags the percentage of fossil fuel companies in each fund, and how much money is being invested in them. For example, according to the tool, 9.6 percent (or $267.3 million) of TIAA CREF’s Social Choice Equity Fund is invested in fossil fuel companies, while Vanguard’s Social Index Fund has 3.45 percent, or $79.7 million.
As You Sow built the calculator in part because when CEO Andrew Behar went through his own 401K, he discovered companies that go directly against As You Sow’s sustainable mission. “I figured out that of the five mutual funds in my 401K, four had Exxon, Chevron, and Halliburton,” he says. “One was 100 percent fracking companies. I had no idea. And if I didn’t know, nobody knew.” (As You Sow has since changed its 401K options).
The non-profit has also developed a deforestation-free funds calculator, while Macroclimate, a San Francisco-based low-carbon investment service, has its CarbonScan Calculator. Herman is also working on new HIP Investor tools to let consumers check HIP’s ratings of their funds, which the firm expects to be out in 2017.
Meanwhile, startups like Grow and OpenInvest are allowing consumers to be more hands-on with their portfolios. With OpenInvest, users have the ability to choose the factors they want to screen for, from reductions in carbon emissions, to workplace LGBT issues, to deforestation impacts. The company algorithm then puts together a diversified basket of ESG stocks. If at any time one of the companies in the portfolio is embroiled in some sort of ESG scandal, users can simply swipe out that investment, and the algorithm will rebalance the portfolio. “It’s the first time in history you can be an activist investor with a passive portfolio,” says OpenInvest CTO Joshua Levin. “We just give you the market, and you can take actions in real time.”
Unlike OpenInvest, which requires investors to put in a minimum of $3,000, Grow allows users to contribute as little as $5. The company also has its own data analytics platform with a score for each investment, as well as a capital management business, for those who want more help than they can get from a robo-investor.
In a slew of new robo-investing products hitting the market, they’re among the first to incorporate SRI in their missions, but unlikely to be the last. Behar believes the demand for responsible investment products is just beginning to swell. “Right now it’s a surfable wave,” he says. “Five years from now it will be a tsunami.”
