Jessica Alsford Executive Director, Head of Sustainable and Responsible Investment Research Audrey Choi CEO, Morgan Stanley Institute for Sustainable Investing
Morgan Stanley is committed to integrating sustainability into its core business activities. Within Morgan Stanley Research, the Firm last year launched S+R | Sustainable + Responsible, a team that develops broad thematic frameworks for understanding the markets through a sustainability lens and then works with equity analysts to generate related investment ideas and advice for institutional investors.
In a new research report, the S+R team identifies seven Sustainability themes and lists out global stocks that offer investors exposure to at least one of these mega-trends and, at the same time, an attractive risk-reward on a 12-month horizon. Jessica Alsford, a Morgan Stanley Research Executive Director who heads up the team, and Audrey Choi, CEO of the Morgan Stanley Institute for Sustainable Investing, answer questions about the new research, its main findings and the synergy with the Institute for Sustainable Investing.
Jessica, you have compiled a list of almost 300 stocks which could provide investors with a way to get exposure to different Sustainability Themes. How did you pick these stocks?
The S+R | Sustainable + Responsible team, which began in January 2013, is a terrific example of partnership and ideas sharing at the Firm. Since the launch of the S+R Research team, and in close collaboration with the Morgan Stanley Institute for Sustainable Investing, we have identified a list of some of the most pertinent Sustainability themes facing the world today.
We then surveyed all of Morgan Stanley's global equity research analysts to get ideas about which stocks from their coverage universe have material exposure to these themes. Finally, we received able assistance from a graduate student at Columbia Business School who interned with S+R as one of Morgan Stanley's Sustainable Investing Fellows.
Drawing from this deep well of resources, we created a long list of stocks that should be relevant to investors, whether they are oriented around socially responsible investing or not. We recognise that some sustainability investors have their own parameters and screens for stocks. Our list doesn't explicitly consider these issues, but it gives different investors the opportunity to include the parameters they think are necessary for a sustainability oriented mandate.
Climate Change, Water Scarcity, Waste Management, Food Availability, Health & Wellness, Improving Lives and Ageing Population are the seven Sustainability Themes you describe in the research report. How did you identify them?
Our aim was to get a mix of environmental and social themes, some of which are topics we have written about in the past, for example ageing population, health and wellness and also within improving lives we have looked at financial inclusion. Some of the other topics are much more common sustainability themes such as climate change and water scarcity. It was about getting a good combination of long-term themes which we think will have a material impact on the way companies need to be operating.
Why is exposure to Sustainability themes becoming increasingly important for investors?
First, there are now around $45 trillion of assets under management that are owned or managed by signatories to the UNPRI (Principles for Responsible Investment). This is certainly increasing the integration of sustainability into the investment process. Second, I think that - while we do label the themes in this new report "Sustainability themes" - they are material issues that are going to have an impact on economic growth and on the demand for different products and services. Whether investors define themselves as socially responsible investors or not, these are mega-trends that make sense to incorporate into any investment analysis. I think this is definitely an area of focus for any investor looking to get exposure to material long-term themes.
You describe the major and inevitable shift in the world's demographics through falling fertility rates and rising life expectancy as a mega-trend whose impact cannot be unwound. How should investors think about this?
I think this is an interesting theme because unlike many of the others, there is really nothing that can be done to change it. The ageing population situation - through falling fertility rates and rising life expectancy - took root more than 50 years ago, and it's now more about finding a way to manage that situation rather than coming up with solutions. As investors consider individual companies, they need to be thinking about the supply of labour and potentially the impact on GDP growth. In Europe, for example, the number of people at working age is already starting to decline. In most other regions the average age is on the rise.
A second area of focus within global ageing should be on which companies are going to be more or less in demand. Some of the stocks that we highlighted are exposed to particular health themes that are going to impact the generation over 65. Investors have to think about which companies are particularly exposed to these different parts of the market.
What does this new Morgan Stanley S+R Research product offer clients?
I like to think about S+R as an umbrella and under that there are different types of sustainability research. We are doing a lot of work around integrating environmental, social and governance factors into all of our equity research. Through these efforts, we are considering material issues that could present investors with both risk and opportunities for companies over the short-, medium- and long-term.
This specific research note is different in that it is looking at companies whose growth and returns should be enhanced by some of these sustainability themes. For example, in terms of climate change we are looking at companies that provide solutions for reducing CO2 emissions. In terms of food availability it might be a company that is helping to increase yields in order to be able to produce more food.
Overall, though, what we are doing is really thinking about how these sustainability themes can impact investment returns, whether that would be on the positive or negative side.
Audrey, Jessica mentioned how the team benefited from the support that the Institute for Sustainable Investing provided in defining the different Sustainability Themes. What, in your opinion, made this collaboration so successful?
Jessica and her Sustainable + Responsible Research team and we at the Institute for Sustainable Investing share the perspective that sustainability is and can be a critical component to the success of enterprises and investments. We think broadly about sustainability issues, like the themes identified in this report, and focus deliberately on how they are key drivers of economic return. We have a broad-based and ongoing dialogue with Jessica and her team about the sustainability themes that we at the Institute have identified. We've highlighted these as some of the most significant macro trends that will drive value and innovation, such as through new markets and revenue potential, increased supply chain and operational efficiencies, and risk mitigation.
How does the Institute for Sustainable Investing identify key sustainability themes that are important for both the economy and society?
The Institute for Sustainable Investing looks to the future in assessing some of the largest trends facing the global community. We believe that many of them are interrelated and have a very clear economic impact. We spend a considerable amount of time looking at projections by economists, scientists and multilateral organisations like the World Bank and the United Nations to identify the trends driving demographics and the resulting challenges and opportunities related to resource scarcity and human development (e.g., healthcare, education). As we look at these trends, it is a logical next step to carefully evaluate their implications - for example, how commodity prices will change or how the economic impact of shifting demographics will change the shape of the labour market. Being able to take a broad view of the larger political, social and economic trends gives us an informed long-term picture of the landscape for companies and investors - be it consumer trends, supply trends or business issues.
How does this new Morgan Stanley Research report add to sustainable investing broadly?
I think this new work is important in several ways. Firstly, it is very important to identify the significant and real upside opportunities that these trends can present. It focuses investors quite clearly on the fact that certain companies are thinking about these macro trends and are directing their business strategies to meet these challenges, making them potentially well positioned for the upside. Fundamentally, we believe at the Institute and at Morgan Stanley as a whole that sustainable investing over the long term will be seen as an attractive approach to investing. Drawing attention to broader sustainability issues, factoring in long-term value creation and risk avoidance, is a key part of what we believe constitutes astute, well-informed investing.
How does this type of research move the field forward, and what will investors with a focus on sustainability be looking to find when they review the research?
This report should be relevant to all investors whether or not they have previously thought about sustainability. It is powerful to have companies identified that have medium- and long-term growth opportunities because of sustainability themes, as well as nearer-term opportunities. I hope that investors who may not have thought previously about sustainable investing will be intrigued by this report and the perspective it provides on how to look at these opportunities and issues as value creation. These are significant drivers of demand and growth.
For an executive summary of the research piece, please visit: Executive Summary on Seven Sustainability Themes
This article is based on research published for Morgan Stanley Research on August 7th 2014. It is not an offer to buy or sell any security/instruments or to participate in a trading strategy. The full version of this research note is available on our Matrix website. Please contact your Morgan Stanley representative for access if needed. Please note that all important disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures.
This material has been prepared for informational purposes only. It does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it.