The environmental and socially responsible index products launched by S&P Dow Jones Indices in late June aren’t the first that the firm has released into the sustainable-investing space, but they do have a novelty. The indexes represent an innovative attempt by the company to target sustainable index products at a specific generation: bike-riding, organic-produce-seeking, social-media-petition-signing Millennials.
“We’ve been hearing from Millennials and tech entrepreneurs that they care about their carbon footprint, and also about firearm and military sales, health and safety associated with tobacco, along with other social values,” says Monali Vora, a New York–based managing director in the quantitative investment strategies team at Goldman Sachs Asset Management (GSAM). The firm, which manages or advises on more than $1 trillion in assets, collaborated on the creation of the two new S&P Dow Jones indexes and is their sole licensee, making them available to clients of its high-net-worth division. “They incorporate these values in all parts of their day-to-day life, and it makes sense that they want to do so in their investments as well.”
The new indexes are the S&P 500 Environmental & Socially Responsible index, which is based on the S&P 500, and the S&P International Environmental & Socially Responsible index, derived from the S&P Developed BMI Ex-U.S. & Korea LargeMidcap.
To create the indexes, S&P Dow Jones Indices applies three filters: It removes corporations with fossil fuel reserves, those that are engaged in weapons production and those that have ties to the manufacture or sale of tobacco. Then the firm screens the remaining companies to remove the lowest quartile of environmental and social performers.
Back-testing shows that the two new indexes would have produced returns over the past five years comparable to those of their underlying benchmarks, says Alka Banerjee, managing director of equity indexes product management at S&P Dow Jones Indices.
The target audience for these indexes cares more about carbon footprint and less about the “governance” part of the environmental, social and governance approach to filtering investments than do other ESG clients, says Banerjee. “Many investors want ESG, but the flavor of ESG might be slightly different based on your demographic,” she says. “This particular design is catering to the very current and present concerns of young and upcoming Millennial investors.”
A few figures illustrate why institutions like S&P Dow Jones Indices and GSAM are so eager to cater to the preferences of Millennials, those born between the early 1980s and early 2000s. According to data from Goldman Sachs, the 92 million U.S. Millennials constitute the largest generation in the country’s history, outpacing the 77 million baby boomers. And over the next few decades, as baby boomers pass their wealth to heirs, an unprecedented $30 trillion will change hands, according to consulting firm Accenture.
These firms and others have determined that environmentally and socially responsible strategies may be one of the key ways into Millennials’ hearts and wallets. A February report by Morgan Stanley declared that children of the 1980s and ’90s are nearly twice as likely as the overall individual investor population to allocate to companies or funds that target specific social or environmental outcomes.
A 2013 survey by Merrill Lynch’s Private Banking and Investment Group found similar results, says Michael Liersch, the firm’s director of behavioral finance. “This cohort is interested in aligning personal values with their investments, whether it is a specific product selection that would be aligned with some social impact they want to have, all the way to negative screening,” he says.
Jessica Matthews, head of the mission-related investing practice at Cambridge Associates, says she’s seeing the generational trend among her firm’s clients too. In 2013, Cambridge Associates launched its annual Next Generation Conference, which is designed to help young heirs ease into their roles as asset owners. Each year the conference hosts a session on socially responsible investing, which is especially popular among younger attendees, says Matthews, who’s based in Cambridge Associates’ Menlo Park, California, office.
“You can generalize to some degree that the Millennials in families are really driving a lot of the interest now” in sustainable investing, she says. “I have argued, too, that when you start to see younger people getting positions on investment committees at foundations and endowments, I think that’s going to start influencing them that way as well.”
For its part, GSAM signaled further commitment to responsible investing in mid-July with its purchase of $550 million ESG-focused firm Imprint Capital Advisors, based in San Francisco. In June GSAM appointed managing director Hugh Lawson to a new position overseeing global sustainable-investing efforts.
Bank of America Merrill Lynch formed a 17-member Millennial Advisory Board earlier this year, says Liersch. Board members are young firm employees across divisions who gather twice a year to discuss how Bank of America Merrill Lynch can help clients align their values with banking and investment activities, how to improve brand perception and how to promote institutional trust among Millennial clients.
The advisory board “was an idea that came out of all the information we’re learning from our clients, and we thought, How can we align that from the perspective of the Millennials internally at our firm?” Liersch says.
Get more on indexing and on wealth management.
