Why Sustainable and Impact Investing Should Be on Your Radar

The pandemic has fundamentally altered the behavior of the workforce. One upshot is that employees and recruitment candidates are asking more of prospective employers.

As just one example, today’s top talent expects their employers to address cultural, political, and social issues—not only in the way they conduct their business, but also in the way they structure their benefits program. As a result leading organizations are increasingly exploring how to optimize workplace financial benefits.

As part of this optimization strategy, organizations are coming to realize that their retirement plans and deferred compensation programs can align with what matters most to in-demand talent—and particularly the Millennial generation (born 1981 to 1996), which currently makes up one-third of the U.S. workforce. According to recent research,¹ this employee cohort is nearly twice as likely as other age groups to purchase from brands they consider sustainable and nearly three times more likely to seek employment at purpose-driven companies.

With this younger generation of employees demanding more purposeful work, the importance of extending this focus to their retirement assets through sustainable and impact investing is also on the rise.

In essence, sustainable and impact investments are those that seek to create positive environmental and social impact, through decarbonization, advancing diversity and inclusion, and more—and with each passing year, it’s becoming more critical for HR managers and benefits managers to prioritize. Research from the Morgan Stanley Institute for Sustainable Investing points to a few reasons² why:

• An astonishing 99% of millennial investors are interested in sustainable investing—the same segment that constitute over 30% of the workforce
• In the past year, 50% of investors and 73% of millennials made investment changes—or plan to—in response to social justice issues
• 93% of individual investors who believe the economy is strong expressed interest in climate-themed investments—with 60% equally interested in solutions that mitigate greenhouse gas emissions

To win the hearts and minds of these purpose-driven employees, it’s become imperative for employers to help their staff learn more about credible ways to help employees meet their financial goals while also generating positive impact.

To meet the mounting expectations of millennials and Generation Z (born 1997 to 2012), companies are looking for ways to include sustainable and impact investments in their workplace financial benefits. There are several ways to do this:

1. Start by understanding what matters most to your people. “Employees attracted to your organization likely believe in your mission statement, core values and sustainability strategy,” says Emily Thomas, head of Investing with Impact for Morgan Stanley Wealth Management. “These can provide a good entry point to uncover your participants’ sustainable and impact investing priorities.” In addition to helping you identify specific funds you’d like to target as part of your platform investment solutions, your guiding principles may also point to the types of investments you may want to exclude from your fund lineup.
2. Broaden the conversation. Beyond your mission and vision, consider what “impact” means to your people. “Because ‘impact’ is a very broad term, not every initiative will resonate with all your people,” explains Daniel Hunt, head of Portfolio Construction and Investment Tools, Morgan Stanley Wealth Management. “For some, it may involve decarbonization and energy transition. Others may be more focused on diversity and inclusion, health and wellness, or local community support.” To help narrow down the investment universe, consider including questions in ongoing employee surveys or informal staff gatherings. These types of intentional conversations can also go a long way towards incorporating sustainability into your corporate culture—a move that further supports the attraction and retention of top talent.
3. Think long term. Many of the environmental, social and governance issues tackled by sustainable and impact investing are endemic challenges that can’t be resolved in a short timeframe. “With these types of complex, systemic issues—such as transitioning to a net zero economy, and building diverse and resilient communities—success will not be measured in a quarter or even a year. This speaks to the importance of maintaining a long-term investment time horizon, which also aligns with their financial goals,” Thomas adds. Communicating these points with your employees can help them build confidence in their financial future—and the future their investment dollars are helping to create for their children and generations to come.
4. Update your investment policy statement. Providing you with a clear investment mandate, including language about sustainable and impact investing in your investment policy statement demonstrates a tangible commitment to this investment approach.
5. Amp up employee education. Despite the mounting interest in sustainable and impact investing, 70% of individual investors still think sustainable and impact investing requires a financial trade-off³.  But the empirical evidence suggests that this is not the case, and that sustainability is, in fact, positively correlated with corporate financial performance.⁴  “Although some of those performance factors have shifted in the wake of the pandemic, empirical studies have shown that impact funds tend to outperform—or at least match the performance—of traditional funds over the long term, in risk-adjusted terms,” Hunt notes. For employees to understand this, enhanced education is needed. By providing your employees with the knowledge, tools, and guidance to make informed financial decisions, you can help position them for long-term financial success.

The rising interest among today’s employees to align their retirement assets with environmental and social goals is, in turn, giving rise to a new employer mandate—one that sees organizations providing the educational support their employees need while demonstrating their own honest commitment to the values that their people embrace.

By explaining the difference employees can make through informed investment decisions and equipping them to become better informed about their portfolios’ sustainability performance, you can do more than bolster your people’s financial literacy. You can also position yourself to enhance employee engagement and retention—and attract a new generation of talent—by showing you share their values.

If you’d like to explore some strategies for adding sustainable and impact investments into your workplace financial benefits offering and providing your employees with the education they need, we encourage you to reach out to Morgan Stanley at Work. Together, we can help to build a brighter future.