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Executive Perspectives

EXECUTIVE PERSPECTIVE: Morgan Stanley incorporates sustainability into equity analysis

Jessica Alsford, Head of Morgan Stanley’s Sustainable and Responsible research team, is driving a strategy to incorporate long term environmental, social and governance issues into the firm’s equity research analysis. We joined her to learn more about this approach and why they are doing it.

Sustainability:  Please tell us a bit about your background, and the background of the team.

Jessica: I have been at Morgan Stanley for nearly 10 years primarily as a stock analyst within Equity Research.  Two years ago the Firm decided to start an ESG (environmental, social, governance) research team with the idea of integrating sustainability-related variables into traditional valuation analysis of companies.  I was asked to lead the S+R | Sustainable + Responsible team and was really excited to introduce this new approach to our research. We wanted to develop a model for integrating exposure to sustainability themes into equity valuation and find a way to show how companies’ earnings and revenues could be impacted by global sustainability themes such as climate change or water scarcity.

Sustainability:  Could you unpack the term “exposure” a bit for me?

Jessica: Exposure for us means ESG “integration” at a company level, or the expansion of traditional risk management to specifically include ESG factors.  For example, we would look at how a retailer’s valuation could be impacted by the lack of transparency over manufacturing processes in its supply chain. On the environmental side, there could be an additional risk for a mining company if it has operations in areas of water scarcity. Analysing these ESG factors in various sectors can be beneficial for all investors, not only SRI oriented investors.

Sustainability: Is there also a positive side to the risk management formula?

Jessica:  Absolutely.  We would call these “ESG opportunities”. For example, we would look at whether a utilities company has exposure to an expanding green energy market or “smart energy” technology. In our most recent report, we identified 7 sustainability themes that present opportunities for companies:

  • Climate Change – the challenge to achieve the 2 degree scenario
  • Water Scarcity – demand to exceed supply by 40% within 16 years
  • Waste Management – urbanisation to drive waste generation to 2.2bn tonnes by 2025
  • Food Availability – agriculture under strain due to population growth and rising incomes
  • Health & Wellness – ill-health a growing burden while safety regulation increases
  • Improving Lives – breaking down inequalities and raising standards of living
  • Ageing Population – specific needs and demands of the over 65s

Sustainability:  The method is interesting, but how is this really different than your historic equity analysis?

Jessica: It’s different because for the first time, we are specifically pointing out explicit risks and opportunities for sectors and companies around these themes. The model that we developed incorporates new variables to help investors understand the valuation scenarios for specific companies on an ongoing basis.   A big challenge is identifying material risk factors and finding data to quantify the companies’ performance on these metrics.

Note: This interview was conducted by Tim Nixon, Managing Editor of Thomson Reuters Sustainability.

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