Key trends, such as millennials beginning to turn 40, the need for technology to help people and ESG’s new status as a must-have, not a nice-to-have, all present market obstructions for the financial sector in 2020. Companies need to rewire their strategic thinking, offerings and communications to connect with today’s customers, borrowers, investors and workforce.
The first millennials will turn forty years old in 2020
That is a pause-worthy moment. Millennials are already the largest generation in the workforce and the most educated generation in history. They are definitely not the wealthiest generation but the rising earning and economic power of millennial men and women who are now in their 30s is inevitably influencing the direction of financial organizations.
As millennials begin to turn 40, their financial lives are becoming more complicated and anxiety is likely to increase because of the cost of living, the pressure to care for family and the need to save for retirement. The financial awakening for many millennials came as they and their parents experienced the great recession and financial meltdown of 2008. They may live with economic uncertainty, but millennials know they have a long life ahead. They are interested in conversations that can help them along the way—and in hearing from real human beings, not just technology.
Tech is becoming finance and finance is becoming tech
The technology budgets of financial services companies have exploded—exceeding $10 billion a year for the largest banks. Financial companies are undertaking major technology transformation projects. Everything that can be automated will be automated to increase efficiency and support profit margins as the industry undergoes relentless fee compression. Artificial intelligence and machine learning are being used to drive more precise decisions about consumers and to detect fraud and abuse. Technology and data analytics are powering new financial products and platforms able to deliver services through a more technologically savvy customer experience.
Fintech startups and big tech are driving real competition in the financial space and augmenting—or in some cases leapfrogging—traditional financial services. In China, mobile payment networks are processing trillions in transaction value in an economy that was mainly cash-based only a decade ago. In the United States, there’s been real innovation in the design and conception of mobile payments coming from the tech side, “not a bank.”
So why has this tech transformation not inspired a deep love of financial services brands or fintech companies by millennials or others? It may have to do with people. Most people are not very good about managing their money or even about talking about it. Technology needs to be harnessed and positioned in ways that helps the financial industry become known as an industry that helps people and society do things better—and one that can attract the tech talent of the future.
Sustainable finance is now “must-have,” not “nice to have”
Several years ago, I authored an “APCO Sustainability Trend Tracker” that asked the question, “Are businesses and investors at an inflection point?” At that point, leading corporations were already well on the path of establishing corporate social responsibility commitments and reporting on material environmental, social and governance (ESG) issues, and financial institutions were establishing their commitments to including ESG and responsible investment principles into their investments.
It was apparent then that neither the corporate world nor the world of finance had yet integrated ESG factors into their overall business strategic planning processes, investment methodologies and C-Suite mindsets. It was certainly an expert-level conversation and a niche in the financial markets and media, particularly in the United States.
Timing is everything: today, it seems like we are in an ESG moment. The asset flows into institutional funds managed according to ESG principles are nearing $30 trillion worldwide. Institutions expect the asset managers they hire to integrate ESG factors into investment decisions. Numerous studies have shown that companies with better ESG performance also produce better and less volatile earnings and stock market performance, or at least that investors don’t get lower returns from socially conscious investing.
At a retail level, the financial power of women and millennials is growing, and they want to invest in and work for companies that do good for society while making money for their investors. The productization of ESG funds is on the rise by financial firms that recognize a new market opportunity.
The growth in green bond issuance demonstrates the potential for raising capital specifically for projects that reduce harm to the environment while increasing asset resilience and sustainable economic development, and promotes interest and innovation in new investment categories. Bank of England chief Mark Carney is taking on a new job in 2020 as United Nations Special Envoy for Climate Action and Finance with a mission to galvanize the global financial system around disclosures of climate risk and investing for a “net-zero” world.
With any financial trend comes froth and fads. We’re now seeing financial media headlines like “The ESG Explosion Has Arrived. Here’s What it Means for You.” The risk is that some companies approach this moment inauthentically. Greenwashing is not a new term, but it is now being joined by purpose-washing.
But corporate and financial leaders are showing a different mindset. This year the Business Roundtable including the CEOs of the largest financial institutions and asset managers issued a Statement on the Purpose of a Corporation, prioritizing stakeholder value and inclusive economic growth as the way to create long-term value for shareholders. Valuing the whole picture including ESG risks and opportunities and externalities is increasingly a must-have, not nice-to-have.