Whether publicly traded companies have verified sustainability plans in place or have been accused of "greenwashing," interest in ESG issues has trended upward over the past year, in which a record $649 billion was poured into ESG-focused funds worldwide in 2021.
As investors continue to put their money into corporations that say they’re making a difference, a notable trend is that most of those investors are more likely to belong to younger generations. New research shows 54 percent of Gen Z and millennials hold ESG investments, compared to only 42 percent of Boomers and 25 percent of Gen Xers.
From combatting climate change to expanding the company’s diversity or calling for more corporate equitable policies, companies need to understand what younger generational investors care about to not only build an effective ESG strategy but also increase the company’s financial portfolio.
What ESG standards do younger generations care about?
While there is no denying ESG concerns have been around for a long time, the recent acceleration of widespread reporting on ESG principles and practices has created the shift of power, money and jobs from baby boomers to millennials and Gen Z, in which passive investing, COVID, social injustice issues, the "Great Resignation" and talent shortages have all been contributing factors.
Despite there not being an exact right way to go about your company’s ESG strategy, contributing to fighting climate change, specifically the threat of global warming, seems to be the most concerning for today’s Gen Z and younger millennial investors. However, social and economic equity throughout the entire corporation also seems just as significant due to these individuals consuming more related news articles, blogs and videos through social media.
Aside from investing in ESG funds, millennial and Gen Z individuals are bringing this interest into the workforce, which means companies focused on attracting and retaining younger talent that can grow within the company need to make this a priority. Gen Z talent currently makes up 46 percent of the full-time workforce in the U.S, where governance factors, such as flexible vs. one-size-fits-all healthcare plans, including mental healthcare and charitable support, or having days off for volunteering and donation matching are of particular concern. Moreover, mentorship and employer engagement are also key to retaining this younger generation of workers.
As a result of reporting ESG principles and practices that younger generations care about, investors, along with employees and customers, will all benefit in continuing to mold an environmentally and socially conscious world. Nevertheless, a lack of ESG transparency remains, affecting how younger generations view specific companies.
The current lack of ESG transparency
With a company’s ESG practices being scored on a rating scale by proxy advisers, such as Institutional Shareholder Services (ISS) or Glass, Lewis & Co., younger generational investors rely on these ESG scores to determine what company’s efforts align most, whereas younger talent looking for employment also gravitate toward companies with ESG scores 25 percent higher than average.
Unfortunately, ISS, Glass Lewis and other proxy advisers scoring companies’ ESG practices are the main culprits when it comes to the lack of transparency in the ESG rating systems created to analyze a public company’s ESG efforts. Investors, employees and customers do not have the same transparency into what specific factors led to ratings. In my opinion, these proxy advisers continue to mislead well-intentioned young investors of ESG funds that are "doing good" through conflicted incentive rating structures.
Given the power of these ESG ratings, publicly traded companies and shareholders must have direct access to how these ratings are calculated. However, proxy advisers call that information proprietary and refuse to disclose it. What began as a public relations and marketing effort for corporations to show employees and customers they are responsible actors now functions as a corporate credit score where those who refuse to play the game are denied access to investor capital.
How can companies engage Gen Z and millennial investors?
If a company’s ESG rating by proxy advisers does not appear transparent as to what ESG practices were listed in the initial reporting and does not seem to engage younger generational investors, the best approach for corporate boards to think about is a digital one, in which companies should further use all channels of social media and other popular smartphone tools to engage this demographic.
One example of interacting digitally with millennial and Gen Z investors can be through virtualizing annual general meetings (AGMs); better known as the most important shareholder meeting of the year. According to packaging software company Lumi, there was a 70 percent increase in the average number of attendees at AGMs in 2021 compared to 2020, which proves beneficial for Gen Z investors and shareholders as a whole in increasing quality of participation.
Moreover, companies can think beyond virtual AGMs and continue to invest in investor relations, whether it’s inviting directors to make regular contact with younger shareholders or just helping maintain a loyal younger shareholder base and value perception. Although younger investors may rely more on social media and influencers to judge whether an investment is worthwhile, corporations can still have the power to take back control and tell their company’s story using a more positive lens.
Generating more authenticity, especially when it comes to ESG issues, will ultimately help fend off proxy adviser ratings from what is true and what is false. If a younger investor feels they’re being greenwashed, younger investors will switch off and find their own information from other sources.
Even though engaging the next generation of investors is no easy task, companies must find innovative ways to capture the attention of younger investors. Thinking digitally, communicating any ESG triumphs and engaging younger investors all year-round are just some ways to ensure companies encourage loyalty in this new generation.