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Executive Perspectives

EXECUTIVE PERSPECTIVE: Values and impact are increasingly relevant to investors

Tim Nixon, Audrey Choi

29 Aug 2017

The world of investing is changing, with new investors looking at how they can achieve both acceptable returns and build a better world with their money.

Audrey Choi, Chief Sustainability Officer and Chief Marketing Officer at Morgan Stanley, provides some insight on this trend, drawing on a recent survey, Sustainable Signals.


Tim Nixon for Thomson Reuters Sustainability:  From the survey, we hear that values and impact are increasingly relevant to how Millennials would like to invest.  What kinds of investment vehicles actually deliver impact these investors can measure?

Ms. Choi: The range of investment vehicles available to investors who are looking to integrate sustainability into their investment practices is wide and growing. According to US SIF, more than $8.7 trillion in US assets under management now consider environmentally and socially responsible factors, which is more than 1 in 5 dollars under professional management.

Fixed income vehicles such as green bonds are gaining traction with corporate and municipal clients. Last year, Morgan Stanley led a $500 million green bond for Starbucks that is supporting sustainable coffee farming across the company’s supply chain.

Many investors are also attracted to socially responsible mutual funds, ETFs, and other pooled products. US SIF reports that in 2016 there were more than 1,000 investment funds incorporating ESG factors, worth almost $2.6 billion.[1]

And financial advisors are getting much more sophisticated when it comes to helping clients meet their own impact goals. We recently launched an in-depth sustainable investing e-learning program for our 16,000 financial advisors to help them work with clients to navigate the range of options for integrating sustainability into their portfolios.

TN:  Is Morgan Stanley developing new options which allow for easier integration of values investing and even spending into the everyday life of investors?

Ms. Choi: Absolutely. Our Investing with Impact Platform now has more than $6.3 billion in assets under management and offers wealth management clients more than 140 investment products that aim to deliver positive environmental and social impact alongside market-rate returns. We offer custom client solutions that include restriction screening, ESG integration that more proactively considers ESG criteria, thematic exposure that helps investors invest in sectors that solve sustainability challenges, and impact investing that targets specific social and environmental outcomes.

Earlier this year, we introduced two new sustainable model portfolios to the Investing with Impact Platform that have reduced account minimums of $10,000. Our hope is that the democratization of sustainable investing will open the door for new investors, including Millennials, to integrate values into their investments more easily.

In May, our Investment Management team launched its first global impact fund, PMF Integro Fund I. The $125+ million fund invests in private equity funds that have the potential for compelling financial returns while achieving positive environmental and social impacts.

At the Institute for Sustainable Investing, we work across Morgan Stanley’s business to provide our diverse client base a range of options for integrating their values into investment activity.

TN: What percentage of 401ks actually offer an ESG option?  How many offer an ESG option which is more than just negative screening of undesirable sectors?

Ms. Choi: Uptake of sustainable investing in 401(k)s has been slow. According to research from US SIF and Mercer, about 14 percent of defined contribution plans offer one or more socially responsible options, but these funds only represent around 1 percent of assets invested.[2] Within our own employee 401(k) program, we offer two sustainable fund options that actively incorporate positive social and environmental factors.

In late 2015, the US Labor Department issued new guidance for retirement investments covered by the Employee Retirement Income Security Act (ERISA) which paved the way for retirement fund managers to integrate sustainability into their plans more readily.

Given that nearly all of the investors we polled expressed an interest in incorporating sustainable investments into their 401(k)s, we expect to see a surge in sustainable 401(k) activity in the coming years. To tap into that, we’ve introduced a sustainable retirement primer to help 401(k) plan sponsors to navigate the opportunities for adding sustainable investing options to their plans.

TN: Is climate change a major focus for products?

Ms. Choi: Yes, we have seen that investors have grown increasingly interested in channelling private capital towards climate change mitigation and adaptation. Among Millennial investors the demand is striking. 82% expressed an interest in thematic investments focused on climate change and fully three quarters said they believe their own investment decisions can influence climate change.

Anecdotally, we hear from our teams all the time that the breadth of investors expressing an interest in climate change is growing, and the pace of those conversations is picking up. This includes institutional clients within the investment bank and individuals within our wealth management business.

TN: Are there products which attempt to engage systemically important actors on climate, say offering discounted capital in exchange for performance?

Ms. Choi: We believe that sustainable investments offer market rate returns and don’t actually require a financial tradeoff. There is a rapidly growing body of academic and industry research that shows that sustainable companies and funds have equal or higher returns than their more traditional peers, and that sustainability can actually reduce volatility. For example, a recent piece by Morgan Stanley Research looked at corporate gender diversity and found this to be true. Companies that have the greatest levels of gender diversity are better investments; they have better equity returns and lower volatility.[3]

TN: What do we know about the generations after Millennials and their likely investment values and goals?

Ms. Choi: This is an important question.

Millennials were heavily influenced by the financial crisis and have shown themselves to be quite fiscally cautious. They are saving for retirement earlier and at greater rates than their Generation X and Baby Boomer parents and also carrying less credit card debt.[4]

Less is known about investment behavior of the Generation Z, as most of them are still minors. But their consumer behavior hints at a strong commitment to values and sustainability. A 2015 Nielsen study found that 72% of Generation Z (aged 15-20 at the time) were willing to pay more for products from companies that were committed to sustainability.[5]

Meanwhile, we are about to see the largest generational wealth transfer in history with an estimated $30 trillion changing hands as Baby Boomers pass down wealth to their descendants over the next several decades. I expect we’ll see a large, and growing, portion of those investment dollars going towards sustainable investments.

———–

[1] Figure B, http://www.ussif.org/files/SIF_Trends_16_Executive_Summary(1).pdf

[2] http://www.ussif.org/files/Publications/SIF_2017PlanSponsors_F.pdf

[3] https://www.morganstanley.com/ideas/gender-diversity-investment-framework

[4] https://www.forbes.com/sites/dianahembree/2017/04/30/personal-finance-expert-far-from-entitled-millennials-are-similar-to-the-greatest-generation/#41b64844d0c7

[5] http://www.nielsen.com/us/en/insights/news/2015/green-generation-millennials-say-sustainability-is-a-shopping-priority.html

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