Millennials and Gen Z are giving up on one of their core values and investing more like boomers

• Preference for environmental, social, and governance — or ESG  investing plummeted in 2023 among millennials and Gen Z.
• Younger investors were less willing to support ESG initiatives if it meant lower investment gains.
• The economy appears to be a factor, but politics might also play a role. 

The turbulence of the economy over the last two years has many people rethinking how they invest their money and now environmental and social issues are paying the price.

Millennials and Gen Zers have traditionally been more supportive of socially responsible investing, but many are now echoing the cautious approach traditionally associated with baby boomers. With inflation still high and ESG investing becoming a political target, fewer young investors are expressing strong concern about things like the environment and social issues, and they are also less willing to sacrifice investment gains in support of these initiatives.

These findings are the result of a survey by Stanford University, the Hoover Institution, and the Rock Center for Corporate Governance, which polled 993 investors across the United States during the fall of 2023, and published results in December.

The survey examined the support for environmental, social, and governance (ESG) issues and investing across different age groups. Investments receive an ESG rating, and ESG investors pick assets that align with their views on these subjects.

In the survey, preference for ESG investing among millennials and Gen Z — aged between 18 and 41 — plummeted significantly compared to the year before. People who responded that they were "very concerned about environmental issues" dropped from 70% in 2022 to 49% in 2023.

Similar drops were also seen for social and governance issues. Younger investors who were "very concerned about social issues" dropped from 65% in 2022 to 53% in 2023. Governance issues fell from 64% to 47%.

Millennial and Gen Z investors' preferences in 2023 were much closer to those of baby boomers compared to 2022. While a gap still exists between the younger and older investing groups, many more millennial and Gen Z investors now align with the more common responses among boomers of being "somewhat concerned" or "not concerned" about these issues.

These findings come against a backdrop of a political backlash against ESG investing that could be influencing investors of all ages.

Boomers, ages 58 and above, were relatively unchanged in 2023, with those "very concerned" about environmental, social, and governance issues at 34%, 33%, and 26%, respectively. All three values were within 1-3 points of their 2022 figures.

Similar drops were also seen for social and governance issues. Younger investors who were "very concerned about social issues" dropped from 65% in 2022 to 53% in 2023. Governance issues fell from 64% to 47%.

Gen X, aged 42 to 57, also dropped in all three categories, although to a lesser degree. Respondents who were "very concerned" about environmental, social, and governance issues were 41%, 42%, and 30%, respectively, in 2023, down from 57%, 54%, and 53% in 2022.

Fewer young investors want fund managers to influence ESG

One of the study's authors, Amit Seru of Stanford Graduate School of Business pointed to the growing reluctance of young investors to risk personal wealth for ESG issues, citing decreased confidence and increased caution in the stock market.

"Young investors tell us that they are much less willing to lose personal money to see progress made against issues such as climate change, sustainability, labor conditions, and diversity in the workplace," Seru wrote. "With their confidence down, investors are more cautious about risking their personal wealth to support stakeholder issues."

Economic pessimism seems to be a significant driver of this change. Millennials now expect lower stock market returns, forecasting an appreciation of 11.8% over the next year, down from last year's expectation of 15.9%.

The survey asked how important it was to the investors that a fund manager use its size and voting power to influence the social policies or practices of the companies being invested in.

Of the Gen Z and millennial respondents, 62% said it was "very important" or "extremely important." That is still a strong majority but a substantial drop from 82% in 2022. Similar drops were seen for environmental and governance issues.

Of the Gen Z respondents, 50% called the influence of fund managers on social issues "very important" or "extremely important," down from 66% in 2022. Again, boomers were relatively unchanged, dropping from 43% to 40%.

Study co-author David F. Larcker, also of Stanford Graduate School of Business, called the decline in support for ESG over the past year among young investors "striking" and wrote that it appeared they are less willing to put their money where their mouths are.

"More investors are unwilling to personally bear the risk of advancing environmental and social change," wrote Larcker. "They might want conditions around them to change, but they don't want it to come out of their pocket."

Indeed, younger investors, in particular, were much less willing in 2023 to support ESG initiatives if it meant lower investment gains. In 2022, the average respondent was willing to sacrifice 6% to 10% of their portfolio for ESG investments. In 2023, the average was just 1% to 5%.

ESG has become a 4-letter word in some circles

Lower confidence in the stock market and the economic pressure from factors like inflation and higher interest rates may be reshaping investment priorities among younger generations. However, there may be another factor — politics.

The term "ESG" first appeared in 2005 with the United Nation's Principles for Responsible Investment, a move to add ESG issues into investment analysis. The push for ESG investing didn't start to take off until the late 2010s, and by early 2023, the ESG funds market totaled more than $6 trillion.

But in 2023, the term became a hot-button topic in the political realm, with Republican lawmakers introducing anti-ESG legislation.

Tim Paradis and Alex Nicoll of Business Insider explained in December just how controversial the topic of ESG investing has become.

"For its critics, ESG might as well be a four-letter word," Paradis and Nicoll wrote. "It represents woke capitalism. It propels a for-profit nanny state."

CNBC's Sara Eisen, host of "Squawk on the Street," echoed this on an episode in December when she was discussing ESG investing and whether some companies just don't want to admit they are still supporters.

"I think a lot of companies still have it baked in, but they don't call it ESG anymore," Eisen said. "It's like a dirty word."

While it's uncertain whether this reduced support for ESG is a transient phase or a new norm, we could learn more if sentiment shifts back toward the investment strategy once the economy fully recovers.

"Whether a rebound in economic confidence leads to a rebound in support for ESG issues remains to be seen," Seru wrote. "It might turn out that ESG is a 'luxury' good for investors."

If there is not a return to strong support for ESG among millennial and Gen Z investors, it could signal a fundamental change in how younger generations prioritize their investments. The days when ESG was a defining feature of millennial and Gen Z investment strategy might be giving way to a more pragmatic, return-focused approach, aligning them more closely with the investment philosophies of older generations.