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If only ESG (environmental, social, and governance) investing was as easy as buying a vowel and two consonants on a game show.
Millennials and Gen Z are leading the digital world and reforming how we invest. ESG and impact investing have gained popularity as the growing Millennial and Gen Z populations inherit wealth. Their dedication to sustainable initiatives is unlike any previous generations, and they continue to be trendsetters in today’s impact investment strategies.
ESG investing requires a lot of time, devoted resources and active monitoring to be successful. Investors must actively engage in the industry to find the right approach to be integrated into one’s portfolio.
Investing in something new also adds risk. ESG investing typically focuses on disruption, innovation, and changing the way we live our lives. This risk seems worth taking to many as more than two-fifths (41%) of high net worth individuals (someone with at least $1M) aged under 40 were drawn to sustainable investments, according to Capgemini’s World Wealth Report.
In order to mitigate the risk associated with ESG investing, it is important to understand the total addressable market, the project’s likelihood of success, and the total capital required for it to succeed.
An added challenge has surfaced due to the lack of measurable results in ESG investing. The true social impact is difficult to measure. Still, with the increased use of Artificial Intelligence, investors now have access to better-quality ESG data that uncovers the capabilities of ESG investing.
We can learn from influential family offices that have successfully pivoted to conscious ESG and Impact investing. What are they doing that is working and how?
Here are the most important lessons we can learn from them;
- Education: Understand what ESG means vs Impact and how both are measured.
- Investment thesis: Develop an investment thesis based on your understanding of ESG and Impact. Define what ESG and Impact mean to you and how it will drive investment decisions.
- Data and Benchmarking: What does your portfolio look like today when analyzed using ESG and Impact ratings? What do you want your portfolio to look like in the future?
- Plan of Action: A game plan shared with your advisors and stakeholders, so everyone works towards your ESG and Impact investing goals.
The new age of investors will require digital investment platforms which incorporate ESG. These new investors are more empowered and savvier. They will be looking for the same tools as family offices to educate themselves (no more greenwashing), develop theses, and incorporate data and benchmarking to achieve their ESG and Impact investing goals.
The greatest investments in history have disrupted the way we live, and the greatest disruption happening in the next couple of decades is related to climate change and ESG. The people that ignore these macroeconomic changes will be left behind.
Disclaimer: This blog is for informative purposes only and should not replace the professional advice of tax, legal, financial, or investment advisors. The opinions expressed here are merely observations of industry trends and should not be taken as stock or sector recommendations.
