I’ve had the good fortune of spending a large part of my adult years in the company of younger people. I’ve raised a son, coached sports, taught university investment classes and run a NexGen-centric network non-profit for three years. Did I mention I also ran a hip-hop record label, too?
My point is that I’ve been close to young people on the verge of influence for most of my life. And for all the anxiety around the current politicization of how we invest, the truth is most of it is largely in their hands.
The next generation, which I define as Gen Z and Gen Alpha, already are current consumers, current or future employees, and are well on their way to becoming leaders and investors. They have a huge influence on all facets of society, particularly when it comes to money.
A staggering $84 trillion in wealth is expected to be transferred to younger generations in the U.S. through 2045, according to consulting firm Cerulli Associates. For context, this “Great Wealth Transfer” is almost as much as global GDP was in 2022 ($101 trillion). Approximately $30 trillion of that will be inherited by women in the next decade alone.
The changing face of impact investing
The roots of impact investing began when people passionate about fomenting solutions to social injustices and climate risks figured out there was a market for profit capital to help advance their causes. Leaders from this “do good” place realized that rather than philanthropic giving, a business and profit motive behind investment in solutions that benefited people and the planet might catalyze significantly greater resources needed to make a difference.
As the cottage industry of impact investing became a larger ecosystem, historic leadership in the space needed to backfill the financial and technical talent needed to structure and manage the investments, and construct market-acceptable terms and vehicles to attract, keep and manage the capital flowing into the space. The new recruits were veterans of “traditional” investment backgrounds, wizened in the ways of financial products and markets. They came to this intersection of doing well and doing good from the “do well” world.
But recent and upcoming practitioners and investors are of generations that don’t distinguish among these worlds. Between increasing impact investing courses at business schools and colleges, and a deluge of media surrounding climate change, NexGen investors perceive the magnitude of impact investing opportunities. They’re sophisticated in both issues of people/planet and the capital markets. The result is a predisposition to action and urgency.
The NexGen influence
One of the most important ways current leaders and those with influence and power can hasten change is by helping young changemakers find their way to their own influence and power. As these opportunities unfold for them, here is how their influence will reshape the direction of impact investing:
- Fewer biases: The next generation of investors and practitioners will lack the biases around investing for transition, resilience and impact. Incessant debates over “isn’t impact investing concessionary” isn’t a point of discussion because NexGen investors and practitioners are conversant in the continuum of risk-adjusted returns – from venture capital to public markets to grants and donations to catalytic investment with objectives to facilitate “crowding in” others.
- Values-based approach: Gen Z and Gen Alpha are more likely to align their investments with their personal values, particularly emphasizing climate/earth resilience and social justice. A Stanford Graduate School of Business survey found that the average investor in their 20s or 30s was willing to lose between 6 percent and 10 percent of their investments to see companies improve their environmental practices, compared to the average baby boomer unwilling to lose anything. Further, the notion of “impact” is beginning to evolve. Students I work with each year come up with a vastly more robust list of issues of people and planet such as trust in institutions, veracity of media, holistic medicines, and rights to work in an AI future. These ideas of impact go way beyond the United Nations’ 17 SDGs (a favorite framing of impact for managers), which were written in 2015.
- Technology integration: Current and coming practitioners will leverage digital platforms and fintech solutions to make impact investing more accessible and transparent. AI will quicken the pace to allow deep ‘knowledge’ work, and more tangible in-person efforts. Already, we’re seeing AI algorithms that process vast amounts of ESG data to identify investment opportunities and assess company performance; natural language processing that’s being used to analyze company reports, news articles and social media to evaluate reputational risks; and AI portfolio screening to weigh investment opportunities against specific impact criteria or ESG standards.
- Innovative and equitable models: NexGen is more inclined to work to conceive structures that enable more ratable, equitable profit-sharing structures among asset owners, employees and/or beneficiaries to increase business, narrow wealth gaps and expand a “missing middle.”
- Global allocations: NexGen understands that climate and social justice issues are global and require efforts worldwide. Capital is likely to increasingly flow to non-Western opportunities. Less reticent to think of the rest of the world as somewhere else, the next generation understands the interconnectedness of the problems and will hasten investments, particularly in the developing world.
- Local action: But global allocations and local action are not mutually exclusive, particularly when humans are coded to care about what they see at home. NexGen likely will double down on more purposeful efforts locally, in an effort to affect lives and outcomes where they live.
We’re in a very fraught and fragile time. But if there’s hope, it’s in the wisdom of all people, and in particular a next generation that inherits a world with problems not of their creation, but who can and will mobilize to save all that we can save. We’re spawning a next generation of better stewards in business and investable markets, and as caretakers for future generations. Benjamin Disraeli once said, “Almost everything that is great has been done by youth.” And as my teenage son told me a few years back, when discussing fixing the world, “Dad, your job is to just get out of the way.” Perhaps so.
