Sustainability Insight
ESG and the Sustainability of Competitive Advantage
 
 

Sustainability Insight

ESG and the Sustainability of Competitive Advantage

 

A holistic approach to sustainability with respect to disruptive change, financial strength, environmental and social externalities and governance (ESG) helps us identify investment opportunities.

ESG is a Component of Quality

We believe that ESG factors are integral to assessing the quality of a company and thus are a vital part of our investment process. When we formulate our investment thesis on the quality of a company, we ask three key questions1 to determine the sustainability of competitive advantage and how it can be monetized through growth:

  • Is the company a disruptor or is it insulated from disruptive change?
  • Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity and low leverage?
  • Are there environmental or social externalities not borne by the company, or governance and accounting risks that may alter the investment thesis?

 

ESG FACTORS MAY MATERIALLY IMPACT INVESTMENT RISK AND REWARD. Companies are increasingly confronted with environmental issues, social factors and relationships with regulators and the communities in which they operate. In this context, managing ESG factors is simply part of sustaining competitive advantage in today’s economy.

ESG EXTERNALITIES MAY NOT BE NOT FULLY PRICED INTO THE VALUE OF COMPANIES. When companies externalize the price of environmental and social issues upon the communities in which they operate, they are by definition over-monetized—earning excess profits because the costs of externalities are not borne by the company. Investors risk paying the price when such excess is corrected and environmental and social costs are internalized to the company income statement.


ESG RISK EVENTS HAVE MATERIALLY DETRACTED FROM PERFORMANCE. In recent years, shareholders have suffered substantial losses following ESG risk events—while there is no silver bullet to avoid such catastrophes, we believe that incorporating ESG analysis can mitigate these risks. 

 
Our Quality Assessment of Companies Has Always Incorporated Governance
 
 
 
 

Long-Term Ownership Mindset

We seek to own big ideas that win over time. Over extended time horizons, we believe that ESG risks are more likely to materialize and externalities are more likely to be priced into the value of securities. Therefore, we continue to innovate and evolve our process and believe that integrating ESG within our investment analysis improves the investment risk and reward profile of client portfolios. 

 
Managing Director
 
 
Executive Director
 
 

 

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific Morgan Stanley Investment Management product.

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The information presented represents how the investment team generally applies their investment processes under normal market conditions. The information has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

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RISK WARNINGS

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy's assets were invested in a wider variety of companies. In general, equity securities values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. This communication is not a product of Morgan Stanley's Research Department and should not be regarded as a research recommendation. The information contained herein has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Prior to making any investment decision, investors should carefully review the product’s relevant offering document. There are important differences in how the strategy is carried out in each of the investment vehicles.

For the complete content and important disclosures, including global disclosures, refer to the link above.

U.S.

A separately managed account may not be suitable for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Please consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectuses contain this and other information about the funds. To obtain a prospectus please download one at morganstanley.com/im or call 1-800-548-7786. Please read the prospectus carefully before investing.

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