Young retail investors do not care about ESG; not really

One of the most widely accepted “truths” about ESG (environmental, social and governance) investing is that young investors are very keen to put their money into companies that show strong ESG credentials.

Entire marketing strategies have been built around this idea. But what if, in fact, this “truth” turns out to be no more than myth?

At first glance, this seems highly unlikely. Study after study has shown that “millennials” and “ESG” are strongly linked. Just a few examples below:

In a UBS Investor Watch study published in July 2020, 69% of millennials (as the media call those born between 1981 and 1996) said they were highly interested in sustainable investing, versus 44% of those in the “baby boomer” generation (born between 1946 – 1964).

A global poll of 1,125 millennials surveyed by UK advisors deVere Group in late 2019 found that ESG concerns topped traditional factors such as anticipated returns, past performance, risk tolerance and tactical allocation when making investment decisions.

Morgan Stanley surveyed active retail investors in 2017 and discovered that 86% of millennials were interested in sustainable investing, and that millennials were twice as likely as the overall investor population to put their money into companies that have environmental or social goals as their target.

Stating an interest in ESG investing is great, but not always enough, it seems, to prompt these young investors to follow their words with deeds. A recently published paper looking at where young people actually invest their money reveals a very different picture.

Using data from the Robinhood trading app, popular with young (average age 31) retail investors mainly in the US, three researchers looked at whether ESG disclosures make any difference to where investors invest.

Perhaps surprisingly, the three researchers — Austin Moss from the University of Iowa, James P. Naughton from the University of Virginia and Clare Wang from the University of Colorado Boulder – found that ESG disclosures were largely irrelevant to retail investors’ portfolio allocation decisions.

ESG announcements largely irrelevant

The three looked at how investors using Robinhood to trade responded to ESG press release publications by the companies whose stocks they owned in the period between June 2, 2018 and December 31, 2019, and compared it with responses to non-ESG press releases.

While investors reacted to non-ESG press releases such as earnings news by buying/selling stocks, the ESG communications did not elicit a similar level of reaction.

Turnover in the number of investors was around 16% lower for ESG press releases than for non-ESG ones in the three-day window centred on the press release day.

“Collectively, our results suggest that retail investors do not adjust their portfolios in response to ESG announcements,” the researchers wrote in their paper.

“Retail investors make as many changes to their portfolios on days when there is an ESG press release as on days when there are no press releases.

ESG is not that high on young investors’ agenda. Photo from FreeImages

In contrast, these same investors make economically meaningful changes to their portfolios in response to press releases that do not pertain to ESG, especially those that are earnings announcements.”

Does this mean that young retail investors totally disregard ESG factors when allocating their money? It is hard to tell, but the study does run counter the “accepted” version that ESG issues are paramount for young investors.

As depressing as the results of this research may be, companies should not look at it and give up on their plans to become more environmentally friendly, socially responsible and stronger in terms of governance.

ESG in and of itself should not be their sole purpose, nor should it be seen as a marketing fad to attract investors.

Instead, company managers should focus on ESG factors because, applied on a wider scale, these can really change the world for the better. And their businesses would thrive in a world focused on improving ESG issues – particularly in the wake of the Covid-19 pandemic.

@AntoniaOprita