Some publicly traded technology companies have verified sustainability plans. Others face greenwashing allegations. Still, there's little denying ESG (environmental, social and governance) is trending. A record $649 billion was poured into ESG-focused funds worldwide in 2021. This was up 35% vs 2020, the previous high.
ESG investors include many from younger generations. New research shows 54% of Gen Z and millennials hold ESG investments, compared to 42% of boomers and 25% of Gen Xers.
From combatting climate change to increasing diversity, technology companies need to understand what engages younger investors.
Climate Change Tops List
The recent acceleration of widespread reporting on ESG principles and practices has created a shift of power, money and jobs from baby boomers to millennials and Gen Z. Passive investing, COVID, social injustice issues, the “Great Resignation” and talent shortages are contributing factors.
Despite there not being a one-size-fits-all way to craft a company’s ESG strategy, fighting climate change, specifically the threat of global warming, seems the most concerning item for today’s Gen Z and millennial investors.
However, social and economic equity throughout the entire corporation also seem significant.
Even when not investing in ESG funds, millennial and Gen Z individuals have shifted technology companies’ workforces. Gen Z talent currently makes up 46% of the full-time workforce in the U.S.
In addition, factors like flexible healthcare plans, including mental healthcare, and charitable support, such as having donation matching and days off for volunteering, are of particular concern. Moreover, mentorship and employer engagement also are key factors for retaining this younger generation of workers.
As a result of companies reporting ESG principles and practices that younger generations care about, investors, along with employees and customers, will benefit as they build an environmentally and socially conscious world.
Lack of ESG Transparency
Nevertheless, there are issues with ESG beyond greenwashing.
For example, ESG investing suffers from transparency issues. Moreover, there is no standard definition of what makes a company good from an ESG viewpoint.
As a result, companies report ESG using a slew of figures and various frameworks. These include the Sustainable Accounting Standards Board (SASB) and the Task Force on Climate-Related Disclosures (TCFD), write Moira Conlon and Leigh Ann Johnston.
"This makes it challenging, if not impossible, for institutional investors to compare a company’s ESG risks and opportunities on an apples-to-apples basis," Conlon and Johnston add.
In some cases, fund managers shop for frameworks, choosing a regime that's most favorable in terms of ESG for companies in their portfolio.
Some proxy advisors use rating scales for scoring technology companies' ESG practices.
An example is the Institutional Shareholder Services' (ISS) ESG scores. Younger investors may rely on these scores to determine if a tech company’s ESG priorities align with their own. In addition, research shows younger talent seeking employment with technology companies gravitate toward those with ESG scores 25% higher than average.
Unfortunately for standardization purposes, there are several ESG ratings groups. In addition, at times they are the main culprits on transparency. Some investors, employees and customers may lack information about what led to an ESG rating. As such, proxy advisors sometimes mislead well-intentioned young investors, claiming ESG funds are ‘doing good’ when they are not.
Given the power of ESG ratings, publicly traded technology companies and technology shareholders must have direct access to how ratings are calculated. However, proxy advisors label such information proprietary and refuse to disclose it.
While ESG began as a PR and marketing effort that let corporations show employees, customers and investors they are responsible actors, now it functions as a credit score. Yet without transparency some companies are put in bad situations. Should they refuse to play the game under current rules, they are denied access to investor capital.
Fortunately, authorities in the U.S. and overseas are cracking down on firms touting bogus ESG credentials. In addition, Washington has proposed regulations that define what companies and funds can label as ESG practices.
How Can Tech Engage Gen Z & Millennial Investors?
If a technology company’s ESG rating is not transparent and does not seem to engage younger investors, corporate boards should consider a digital approach. Companies should utilize social media channels and other popular smartphone tools to engage this demographic.
Virtual Annual Meetings: One example of interacting digitally with millennial and Gen Z investors is through virtual annual general meetings (AGMs).
Packaging software company Lumi made its AGM virtual in 2021. As a result, it experienced a 70% increase in the average number of attendees compared to 2020. Attendance, virtual or in-person, can prove beneficial for Gen Z investors, but also for all shareholders. Attending an AGM increases quality of participation, writes Kerry Leighton-Bailey, Lumi's director of shareholder engagement.
Increase Investor Relations: Moreover, technology companies can also think beyond virtual AGMs and bolster investor relations, Leighton-Bailey argues. 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, technology companies still have control. For example, they can hold an investor day, Leighton-Bailey writes. This lets them tell the company's stories using a more positive lens.
Bolster Authenticity: Generating authenticity, especially on ESG issues, ultimately will help engage younger investors. When younger investors feel they’re being greenwashed, they will switch off and seek information from other sources.
Even though engaging the next generation of investors is not easy, Leighton-Bailey says, technology companies must find innovative ways to capture their attention. Thinking digitally, communicating ESG triumphs and engaging younger investors all year round are just some of the ways to ensure technology companies encourage loyalty in this new generation.
Terry Branstad is national chairman of The Corporate Citizenship Project. He was U.S. Ambassador to China (2017-2020) and governor of Iowa (1983-1999/2011-2017).
[Editor's Note: The writer’s views do not necessarily reflect those of PRNEWS. We invite opposing essays from readers.]