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Executive Perspectives

EXECUTIVE PERSPECTIVE: The Reasonable Millennial Investor

Shari H. Littan

09 Aug 2018

9 August 2018

“If 87 percent of today’s market value consists of intangible assets, how a company encourages and preserves its relationships with its customers, workforce, and community is highly material.”

Shari Helaine Littan, CPA-JD, is a full-time editor and author for GAAP Reporter available on Thomson Reuters Checkpoint. Here she explains that interpreting the legal term “reasonable investor” is currently undergoing a shift as the strain on the world’s natural resources changes the game completely. She also makes light of the controversy over investing both responsibly and sustainably and how this will affect Millennial and Post-Millennial investors moving forward. 


A crucial concept in securities law is the “reasonable investor.”

Much of modern securities law, particularly in the US, is a disclosure system.  Presumably, if investors have adequate information, collectively, the market will avoid wasteful enterprises and allocate precious and limited capital toward the most productive and efficient investments. To determine the nature of quantitative and qualitative information that investors need – that is, materiality – the law developed the hypothetical reasonable investor.

Many have contended that although some investors today may care about business sustainability issues, they are on the fringe.

The reasonable investor, the argument goes, does not care about “corporate shaming,” so that disclosure about matters such as climate risk, stranded assets, water dependence, and the utilization of diverse human talent is unnecessary.

From this perspective, the views of Millennials and Post-Millennials often are dismissed as youthful, sentimental morality rather than financial reality. Referencing the legal standard, information about these concerns is characterized as not reasonable.  However, Millennials, generally born between the mid-1980s and mid-1990s, are in their 30s, when many begin to make a decent income, start families, and become investors.  Post-Millennials are entering college years and starting their first jobs.  They have been encouraged by generations before them to save early. The younger they start saving, the more they’ll have for retirement.

Add 35, 40, or 45 years.  These younger investors won’t begin to retire until around 2060.  Post-Millennials can look to 2065 or 2070.  If the overwhelming scientific consensus is correct about the effects of greenhouse gases, raising sea levels, rising temperatures, ocean acidity, droughts, and mass extinctions, sustainability factors become critical inputs to investment decision-making.

If 87 percent of today’s market value consists of intangible assets, how a company encourages and preserves its relationships with its customers, workforce, and community is highly material.

Proper evaluation of these factors helps direct a lifetime of hard-earned resources whether as conventional investors, employees, or business owners.

Let’s reflect on the many conversations – either real or hypothetical – with our children, nieces, and godsons about their investment choices as relatively young adults who are seeking investment advice.  As your daughter finds virtue in plant-based everything, she contemplates almond-milk production.  Almond trees, however, take about three to four years before they bear fruit, and six to seven years to peak production. Under the proper conditions, they can continue to produce over five decades.  This largely California-based agribusiness heavily relies on water where scarcity risk is a natural and financial reality.  In these circumstances, a reasonable investor needs to consider expected water availability for at least a decade into the future.

Or, perhaps your nephew’s first real grown-up vacation launches a business interest in recreation and leisure at beachfront properties.  Considering that basic electricity is still unreliable in post-Maria Puerto Rico, the likelihood of destructive storms is material to this investor’s information mix.  These risks affect not only the hotel and its properties but also all businesses that depend on the movement of people and goods around the world.

Even as the price of a barrel of oil fluctuates up from $50, companies and policymakers are continuing to lead a global transformation from traditional energy sources to renewables.  Over time, the return on investment of renewables may very well prove superior to the returns from fossil fuels, which take significant costs to find, pump to the surface from deep ocean waters, and deliver to market in a usable form.  What will these conditions do to a 35-year investment into a conventional energy company, long considered a mainstay of an investment portfolio?  What will it do to entities all along the supply chain, such as utilities, specialized trucking, car components, and even the mom-and-pop diner in coal country?  In these circumstances, information about the effects of climate change and energy transformation is material.  As a baby-boomer investor helps fund his granddaughter’s college education as part of the class of 2040, today she is just “very sad” that unprecedented flooding and sinkholes are interrupting her summer visit to Hershey Park.

She won’t retire until 2075 and needs non-wasteful investments as she lives another 25 years to see the turn of the next century.

In summary, meeting the expectations and needs of a reasonable investor requires an assessment of materiality, which the US Supreme Court defined based on whether a substantial likelihood exists that disclosure would affect the total mix of information for the reasonable investor.  Given the limitations of the planet to provide resources and reabsorb the waste produced by humans’ modern activities, the markets’ increasing demands for material sustainability information is highly reasonable.

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