ESG investing can help bridge the generation gap during wealth transfer

Wealth transfer

ESG can essentially be used as a launchpad for discussing how family wealth can have real impact on the pressing global issues of our time.


If there is one truism about families, it is that generations don’t always see eye to eye.

That can be especially true when it comes to money. Whether the subject is how to earn it, how to save it, how to spend it or how to invest it, there are countless areas where parents and their children might disagree.

That reality is potentially problematic, as we are in the early stages of the largest wealth transfer in history. Approximately $30 trillion is set to pass from Boomers to Generation X and Millennials over the next several years, according to a study by the consulting firm Accenture. At its peak, that’s 10 percent of the total wealth in America changing hands every five years.

With trillions of dollars at stake, families need to come to a better understanding about how the next generation will handle what’s in store for them.

“This is a gigantic amount of wealth coming down to the next in line – nearly 70 percent of the wealth in the U.S. will start to transition over the course of the next 20 years,” says Angie O’Leary, head of Wealth Planning at RBC Wealth Management—U.S. “My sense is that we have some work to do in helping the next generation prepare to be inheritors of this wealth. Part of that is talking about purpose and what’s important to them; that’s the way to connect the dots for the next generation.”

Along those lines, one key to help unlock the necessary conversations around money may be responsible investing, or investing according to environmental, social and governance (ESG) principles.

This is an area where younger generations—Generation X increasingly, and Millennials and Gen Z even more so—are extremely engaged, to a much greater extent than their parents, according to research by the consulting firm Cerulli Associates. For that reason, ESG can essentially be used as a launchpad for discussing how family wealth can have real impact—not only on the financial security of the next generation and their children, but on the pressing global issues of our time.

Here’s why ESG is a great tool for jumpstarting those conversations:

ESG taps into something the next generation cares about

For Boomers, total return tends to be the primary goal of any investment strategy. But as important as that is, it’s not enough to get younger investors truly interested and engaged.

Instead, it’s ESG that really moves the needle for them. In fact, 73 percent of affluent Millennials say they prefer to invest for positive social and environmental impact, according to Cerulli Associates. That compares to 44 percent of Gen X and only 38 percent of Boomers.

This shift is so dramatic that it’s changing how financial advisors are doing business. A huge majority of U.S. asset managers—84 percent—expect to see high demand for ESG strategies from Millennial clients over the next two to three years.

“The real challenge is: How do you actually engage with that next generation?” asks Kent McClanahan, vice president of responsible investing at RBC Wealth Management-U.S. “If you just start talking about returns, often their eyes will glaze over and they quickly change the subject.”

But if you talk about investing in companies that are taking on climate change or advancing social justice, McClanahan adds, that’s the kind of thing Millennials and Gen Z enjoy talking about.

Ask them, ‘Would you like to invest your money that way?’ Maybe they had never even thought about that,” he says.

ESG facilitates the exchange of ideas

Money can be a tricky subject to tackle, as there can be many different obstacles to fruitful conversations. Some families don’t talk about it at all, because it could be seen as crass or taboo, or because it might upset intra-family dynamics.

Another obstacle is that younger investors might not feel ready or educated enough to discuss how to be stewards of significant wealth. Or, since inheritances might still be a decade or two down the road, they might feel apathetic about putting in the work of serious learning right now.

Whatever the obstacle might be, ESG can help you overcome it, McClanahan says. Even better, ESG makes the subject of money more of a two-way conversation.

“ESG is a great opportunity for kids to bring something to the table that parents might not understand,” he says. “Younger generations have an innate sense of what environmental and social responsibility look like, and how to bring that into a portfolio.”

While having those conversations around values-based investing, family members may find they might not all be on the same page. And that’s OK, explains O’Leary. It’s natural to have a range of viewpoints within a family, and that shouldn’t prevent these money talks from taking place.

“I think it’s healthy to have different values,” says O’Leary. “You want your kids to have their own principles around what they’re investing in. That’s why ESG is a great way to spark this discussion. It can even be enlightening for parents, to be in the room together and hear about what is important to their kids.”

ESG gives the next generation a starting point

The idea of portfolio management, especially with large sums of money, can seem pretty overwhelming to any new investor. ESG can open that first door—giving younger generations a way to understand their holdings, and helping them decide what they might want (or not want) to invest in.

That kind of investing framework can be especially helpful for high-net-worth clients and family charitable foundations. If there are millions of dollars at stake, some guiding principles or a policy statement—perhaps with an ESG focus—can help determine exactly how that money is going to have an impact.

But as much as ESG is a useful starting point for parents and kids, it is also an ideal subject for someone else: financial advisors. By helping facilitate these family discussions, financial advisors are not only giving investors the data they need to make smart decisions, but they are also forging new bonds with the next generation.

“Financial advisors can bring people together and show that you don’t have to give up returns by investing in ESG—and that in some ways you can do even better,” says McClanahan. “It’s an opportunity for advisors to build relationships, translate all that information and help families come to an agreement.”

Due diligence processes do not assure a profit or protect against loss. Like any type of investing, ESG investing involves risks, including possible loss of principal.

RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.

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