Welcome to the next gen of investors

Right down to rejecting taxis, newspapers and wires - the next generation of investors doesn’t feel compelled to honour tradition. Combine that with the wealth and working years on their doorstep, and the demands of investors are on the cusp of an evolution.

Generation Z is sure wielding an outsized influence on the business and investing world. They don’t herald the hallmarks of previous generations – they work where they want, wear what they want, and are healthy sceptics of power and prestige.

The image that conjures is often stereotyped as presumptuous and privileged, but to the contrary, it represents a generation whose investment decisions are far more based on a social consciousness and active involvement than years gone past.

One of the key values they are driving home to businesses worldwide is the concept of diversity and inclusion. To them, it’s obvious: diversity creates better business outcomes and being inclusive creates nicer places to work. It’s hard for them to imagine such statements were ever up for debate.

And despite their youth – the oldest of them is approaching their mid-20s – they are having a big influence on the older generations around them.

“They set a high bar,” says Camille Wynter, a 28-year old Sustainable Investment Analyst at AMP Capital, of the way the new generation thinks.

Gen Z is fast replacing Millennials as the topic de jour – and older generations are watching closely, knowing that their attitudes and values will drive many social and economic aspects of society.

This new generation is distinctly different to its predecessors in some important ways.

Definitions of Gen Z are fuzzy – there’s often no agreement on these types of generational terms until after they come of age – but most agree it starts with people born from the mid to late 1990s. So they are only just beginning to have an impact on the corporate world.

They have been globally connected through the internet and social media for their entire lives, which has immersed them in diversity and differences of opinion from a young age.

This is driving a more accepting view of diversity and an innate understanding of its benefits. But it’s more than that.

Research out of the US shows this generation is also inherently more diverse than the generations before them – and that racial diversity in particular is increasing with time.

In the US, census data shows that for the first time, white residents who are not-Hispanic make up less than half the nation’s population under the age of 15¹.

Gen Z as a whole is 50.9 per cent white in the USA, more diverse than their Millennial predecessors (55.1 per cent white) and the Generation X population before them (59.7 per cent white)1. The changes are driven by aging and lower birth rates in the white population alongside strong immigration from Asia.

As these people enter the workforce, they are bringing strongly-held views on diversity and inclusion – along with a range of other social, environmental and ethical issues – that present a challenge for corporations and investment managers alike.

Work habits are one way the next generation are going to extend their influence.

“This cohort find it really difficult to work for a brand that has been found out to not be doing the right thing,” says Wynter.

“They get quite defensive about it – they are just not willing to put their name next to brands that they don’t think are doing the right thing.”

Companies that do not value diversity and actively practice inclusion are going to find it tricky to attract and retain a generation of talent that values these attributes.

Consumption is also a clear way they are driving their preferences home to the corporate world.

Gen Z consumers expect brands to take a stand on issues like diversity – and with strong digital research skills and easy access to information – they are quickly aware of contradictions between a company’s statements and its actions².

“There’s about to be a massive wealth transfer from baby boomers – the biggest transfer of wealth in history – so Millennials and Gen Z are going to have a huge pool of money, trillions of dollars, to play with,” says Wynter.

From an investment perspective, AMP Capital is looking for action from companies that goes deeper than mere corporate policy.

Best practice companies are reinforcing their statements on diversity and inclusion with measurable targets that are tied directly to executive remuneration. Diversity remains a key intangible driver of corporate success. Further, repeated studies link gender diversity to business value³.

AMP Capital produced a study showing companies with more than two women on the board have better quality corporate governance⁴, including fewer issues with related-party transactions, half the number of concerns about board composition and stronger independence and better remuneration governance.

Other studies have shown companies with gender diverse boards generate better stock market returns and higher returns on equity than all-male boards⁵.

Now, the research is broadening beyond gender, finding benefits from diversity of ethnicity, culture, age, socioeconomic background and more.

“Today’s leadership roles are currently dominated by Baby Boomers⁶,” says Karin Halliday AMP Capital’s Senior Manager, Corporate Governance.

“The sooner boards and leadership teams can encompass a broader range of age demographics, the less disruptive this transition will be.”

“Companies achieving – or at least consciously moving towards – broad diversity will deliver several positive outcomes for investors.”

AMP Capital has been pushing for diversity in skills and geographic background on boards for some years and has also adopted an innovative approach to incorporating the views of younger generations into its investment approach by establishing a Youth Advisory Committee.

The Committee is made up of 12 university students drawn from a diverse range of backgrounds across Australia and New Zealand who meet regularly to debate ethical issues.

“We have representatives from large institutions across Australia and New Zealand who come in a couple of times a year to discuss ethical issues with us and whether a company should be in [one of our] funds. They challenge us on various things. It’s a two-way open channel which is pretty rare in the industry,” says Wynter, who chairs the committee.

“Some of our clients from large super funds said ‘we want to know what our younger members think is important.' This generation is going to make up a huge part of our member base over the coming decade, so it would be great to get an insight into what they care about and how they think we should be investing their money.”

The first meeting of the Youth Advisory Committee focused on animal rights in the pharmaceutical and cosmetic industries. Another session worked on data privacy and social media.

“The committee has been a great idea,” Wynter said. “And actually, it was proposed by one of our graduates.”

¹ https://www.brookings.edu/research/less-than-half-of-us-children-under-15-are-white-census-shows/
² https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/true-gen-generation-z-and-its-implications-for-companies
³ One example cited by Harvard Business Review includes: https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/3063/female_representation.pdf
⁴ https://www.ampcapital.com/au/en/media/articles/2016/December/media-release-investors-must-keep-focusing-on-gender-diversity-amp-capital
⁵ https://plus.credit-suisse.com/r/NMMnp2AF-WElY95
⁶ https://www.ampcapital.com/au/en/insights-hub/articles/2020/January/beyond-gender-a-new-conversation-for-corporate-diversity-in-2020