Sustainable investing enables millennials in the UAE to select investment portfolios based on values and personal priorities.
editor's pickThursday 20, December 2018
The concept of sustainable investing—an investment approach of ‘doing well by doing good’—is gaining ground across the globe. Investors around the world are increasingly convinced that robust returns and a positive impact are not mutually exclusive.
A Schroders Global Investor Study 2018 report revealed that 86 per cent of investors across the UAE say sustainable investing has become more important to them over the past five years. However, a lack of information on sustainable investments limits the feasibility of it in the UAE.
Of the staggering 86 per cent saying they are currently engaged in sustainable investments, only 16 per cent can provide an accurate definition, a number which demonstrates a limited understanding of what it sustainable investing entails as well as the returns and impact it can achieve. The UAE’s demographic—which largely comprises of millennials—has a majority of investors who have increased their exposures to sustainable investments over the last five years.
Schroders stated that 71 per cent of 18-24 year-olds and 75 per cent of 25-34 year-olds have increased diversification of their sustainable investments. The group of investors who considered themselves to have expert levels of knowledge revealed that they invest 54 per cent of their investment portfolio sustainably to enhance diversification.
The millennial cup of tea
The demand for sustainable investments is being driven by millennials globally, particularly and in the UAE. This demography prefers investments that are aligned with personal values, and as a result, fund managers are increasingly allocating resources to develop products and capture this emerging client segment.
According to an EY report, The Experience Factor: The New Growth Engine in Wealth Management, when assets change generations, firms typically lose 70 per cent to 80 per cent of those assets. The trend can also be confirmed in the UAE as most asset managers are now encouraging socially responsible investment across many fields including digital disruption. Additionally, thematic investments encourage sustainability and they are seen to be increasingly popular with the millennial.
According to the Cambridge Institute of Sustainable Leadership, thematic investment amongst millennials has been found to be the investment strategy of selecting companies that can be classified as falling under a particular investment theme. This type of investment strategy covers areas like water distribution, agriculture as well as low carbon energy, pollution-control technology, healthcare and information technology.
As a form of socially responsible investment (SRI), thematic funds tend to cover a variety of sectors and pick companies within these sectors that are relevant to the theme. Thus, a millennial investor interested in healthcare, invests in pharmaceutical companies, hospital companies, health insurance companies, nursing homes, surgical equipment manufacturers and hi-tech and infotech companies that support any of the former.
In fact, UAE investors are more interested in healthcare, recording a 73 per cent majority in comparison to the global average of 66 per cent, according to findings from Schroders. Thematic funds focus on companies that are active in particular areas. Majority UAE millennials are said to hold great appeal for expertise, particularly those who feel they have a higher level of investment knowledge in their fields of interest.
Millennials who incorporate environmental, social and governance (ESG) factors into investment decisions choose to invest in companies, organisations and funds with the purpose of generating measurable social and environmental impact alongside a financial return.
Nurturing a conducive environment
According to EY, with an estimated addition of two billion people by 2050, global demand for food, water and energy will drive the need for innovative improvements in infrastructure to address the resource demand associated with a growing population.
The UAE government has made significant strides in creating an investment ecosystem that attracts environmentally sustainable investment, clean water and sanitation, innovations in energy generation and distribution, as well as improved health care. Additionally, efficient transportation systems also provide an abundance of opportunities for sustainable investment growth.
These investment sectors continue to display a track-record of market outperformance, investors of all types including millennials, in particular, are demanding their wealth and asset managers to provide products that not only outperform but also align with their values. In contrast to previous generations, millennials consistently select investments that align with their values.
Globally, the opportunity to maintain strong financial performance coupled with values-based investing is extremely attractive to many types of investors, especially millennials. As Millennials begin to engage with wealth and asset managers, financial analysts believe they will continue to disrupt the industry due to their sizeable population, family inheritable wealth and preference for digital channels of communication.
Millennials are the investors of tomorrow and firms should shift strategies to incorporate the desires of these socially responsible investors. Globally, asset management firms are witnessing an industrial shift from a passive investor population, which is dependent on the income from defined benefit and pension plans to a population that is self-funding via their defined contribution plans.
UAE millennials are taking a more active involvement in their own investments as they wish to be more actively involved in controlling their own destiny and this group of investors believe that their investment decisions can influence the issues they care about.