Professional investors have been stubbornly resistant to the idea that climate change should have any bearing on their decision-making. They continue to sink money into high carbon industries while ignoring the returns available from green infrastructure like clean energy and sustainable transport. These low carbon developments face an annual global funding gap of $1 trillion dollars. As Martin Wolf said in the FT, “Investors are implicitly betting [that] the world will abandon its pledge to keep emissions below the level thought to produce a rise of 2C.”
This may well turn out to be bad news for all those whose money is being invested in this way, many of whom are ordinary savers. But the consequences will be worse for Generation Y, the cohort born between 1980-2000, and those who come after them. Their quality of life decades into the future will be determined by the outcomes of today’s investment decisions.
There are 14.5 million young adults between 18-34 in the UK. So far they haven’t wielded much influence over the financial sector and relatively little is known about how they approach investing. Will they be the generation to force banks and pension funds to take sustainability more seriously? To find out, we commissioned a series of focus groups to test Generation Y’s attitudes to personal finance and sustainable investing.
Too little money, too much debt?
It’s frequently assumed that this generation has too little money, or too much debt, to care about saving and investing. On both counts, we found this wasn’t true. There was a very strong savings culture among the young adults we worked with. Over the past decade, 16-24 year olds have saved more than any other age group, as a proportion of their income. And, since 2005, in every year bar one, the under-30s have on average saved and invested more than they have spent repaying debt.
We also found intense cynicism about the financial sector amongst the people we worked with. They were fearful of the risks they see as integral to banking and finance. They make conservative financial decisions to keep their savings safe. They mostly keep their savings as cash in the bank, seeing stocks and shares as too risky. One survey found that young adults would be ten times more likely to save than invest if they were given an extra pay cheque.
Yet, while few in Generation Y have the appetite to actively invest, the government’s auto-enrolment scheme means the majority will now have retirement savings invested in the stock market. By 2013 nearly half of eligible under-35s had been auto-enrolled into workplace pension schemes, with barely one in ten of those approached opting out.
Generation Y won’t demand sustainable options
Our findings suggest Generation Y won’t be challenging banks and pension funds to invest their savings more sustainably. They lack the financial confidence to question the decisions of financial professionals. They see sustainable investing as something for people who want to do good with their money, rather than a ‘normal’ financial choice. They also questioned whether their individual choices could have any impact on huge global challenges such as climate change.
This is the Generation Y savings challenge: the generation which is vital to the future of the savings sector, and will be most affected by its current investment patterns, has very little interest in long term saving or in challenging unsustainable practices.
The answer: education, communication and regulation
But we shouldn’t abandon hope. Actually, the young adults we worked with found the concept of sustainable investing appealing, they just didn’t trust the ethical credentials of the banks offering these types of products. This is fundamentally a communications challenge. If it can be overcome, their responses suggest that sustainability could help to increase young adults’ engagement with investing and their trust in banks.
Financial education has a role to play in making sustainability part of normal financial decision making. The finance sector could help to achieve this by including carbon emissions data as part of standard financial product information. Working in partnership with civil society organisations would also help to overcome the credibility gap.
However, this also implies that, if the impetus isn’t going to come from consumers, the government should be stepping in. Making the pension providers which benefit from auto enrolment disclose the carbon impacts of their investments would be a good place to start. Reforming the pension tax relief regime (which totalled £23 billion net in 2012-13) so that investments into high carbon industries are no longer subsidised by the state would create financial incentives for investment managers to address climate impacts more urgently.
We didn’t find that Generation Y don’t care about climate change and environmental crises. But we did find that they don’t care as much as they should, given the scale of the consequences they could end up facing. To safeguard their future, financial and otherwise, business and government need take on the challenge and create the conditions for them to be able to make informed, positive investment choices.
William Andrews Tipper is the author of Green Alliance’s recent report The future savings challenge: the implications of Generation Y’s attitude to finance and sustainability.