How Technology Companies Can Get Their ESG Strategy to Appeal to Youth

Please welcome guest contributor Terry Branstad. He is the National Chairman of The Corporate Citizenship Project, a former U.S. Ambassador to China from 2017 to 2020, and formerly, the longest-serving governor in U.S. history. He is President of Des Moines University’s Medical School, and has served as the Iowa Lieutenant Governor and as a three-term representative in the Iowa state legislature.

Terry’s topic is one that has been in the news a lot lately. Recently, I published a posting on the subject based on The Economist’s conclusions about the current state of ESG as a standard by which investments are measured beyond the traditional financial performance indices.

In this posting, Terry looks specifically at technology companies and the challenges they face in attracting and retaining younger generations as investors. As always your comments are welcomed. 

Whether publicly traded technology companies have verified sustainability plans in place or have been accused of greenwashing, environmental, social, and governance (ESG) standards continue to trend upward. A record $649 billion was poured into ESG-focused funds worldwide in 2021.

As investors continue to put money into technology companies making a difference, there is a misconception that a majority of investors belong to younger generations. New research shows the distribution in ESG-motivated investment: 54% are Gen Z and millennials, 42% are baby boomers, and 25% are Gen Xers. 

ESG Standards That Younger Generations Care About

From combatting climate change to expanding diversity in the boardroom and instituting more corporate equitable policies, technology companies need to understand what Gen Z and Gen X care about. If any sector of the global economy is sensitive to ESG it should be technology with its appeal to younger audiences. That’s why the recent acceleration of widespread reporting on ESG principles and practices is creating a shift in power, money and jobs from baby boomers to millennials and Gen Z, in which passive investing, COVID, social injustice issues, the Great Resignation and talent shortages are all contributing factors.

Despite there not being an exact right way to go about a company’s ESG strategy, contributing to fighting climate change, specifically the threat of global warming, seems to be the most concerning for Gen Z and millennials. Social and economic equity throughout the entire corporation, however, seems to be just as significant because of widespread coverage of this subject in the news, blogs, videos and on social media.

Even if not investing in ESG-based funds, millennials and Gen Zers are seeking to join companies declaring their ESG credentials. Gen Z talent today makes up 46% of the full-time U.S. workforce, where governance factors, such as flexible healthcare plans, mental health programs, and charitable and social-cause support are part of the corporate culture. For Gen Z mentorship and employer engagement are key concerns in choosing the workplace in which they want to be.

Young investors like young employees look for ESG principles and practices in corporate reports. The lack of ESG transparency, on the other hand, has a negative impact on their views about technology companies.

The Current Lack of ESG Transparency

Rating ESG practices presents a challenge. Ratings require proxy advisors who make this their specialty. One such is Institutional Shareholder Services (ISS). How much do younger generational investors value ESG scores when considering employment or investment? The data shows they gravitate to technology companies with ESG scores 25% higher than the average. 

Unfortunately, ISS and similar proxy ESG advisors are not terribly transparent about the way they analyze and score corporate practices. The result is these proxy advisors continue to mislead young investors about ESG funds that reflect an actual company’s “do good” ratings. That’s why there is a call to make ESG ratings and calculations transparent. Proxy advisors, however, are resisting calling their methodologies and calculations proprietary. So what began as a public relations and marketing effort by corporations to show employees and customers they are responsible actors, is  now functioning in a similar way to credit scoring. Credit scoring proxies, however, have established credentials earned over decades. ESG proxy advisors on the other hand are still figuring out the essentials. But companies who refuse to include ESG in reporting may find themselves increasingly out of synch with those with investment capital.

How Tech Companies Engage Gen Z and Millennial Investors

If a technology company’s ESG rating by proxy advisors, like ISS, does not appear transparent to younger generational investors, the best approach for corporate boards is to think about utilizing all the digital channels available to engage this demographic. 

One example of interacting digitally with millennial and Gen Z investors can be through virtualizing annual general meetings (AGMs). According to a packaging software company, Lumi, it received a 70% increase in the number of participants attending AGMs in 2021 compared to 2020 through virtual access. 

Moreover, technology companies can also think beyond virtual AGMs by inviting directors to regularly contact younger shareholders or messaging them over social media to maintain their interest while getting their feedback. It is a vehicle that can be used to shape corporate programs and policy development while performing valuable outreach to younger investors and potential employees. Generating this type of authenticity counters proxy advisor ratings that may inaccurately reflect a company’s ESG credentials. Younger investors today are more “greenwash” sensitive than ever, to the point that they seek independent confirmation of corporate environmental and social responsibility, reward those that pass muster, and walk away along with their investment dollars from those that don’t.

Is it easier to get youth to invest in the technology sector today because of a growing interest in corporate ESG reporting? Yes. But that doesn’t mean youth loyalty comes automatically. Technology companies need to continuously demonstrate their ESG credentials to keep the loyalty of this new generation of shareholders.