From better metrics and bond-market innovations to broader investor access, here are some of the key developments in sustainable investing.
Once upon a time, sustainable investing lived on the outskirts of Wall Street. Not anymore. Over the past several years, impact investing and other forms of sustainable investing have become a global phenomenon, driven by investors who are demanding more corporate accountability for environmental, social and governance (ESG) issues, as well as public-sector momentum to fight climate change from the Paris Agreement.
As ESG concerns increasingly dictate where people spend and invest, the momentum for sustainable investing will continue to grow. Here are five overarching trends that Hilary Irby, Morgan Stanley’s Head of Investing with Impact, is watching:
1. Better Data and More of It
Investors across the board—from asset managers and retail investors to foundations—want to understand the nonfinancial impact of their portfolios. In order to really understand impact, we need better data as input into investment strategy and as an output for impact measurement. In terms of inputs, more sophisticated ESG integration will allow investors to look deeper than company ratings and scores and dig into performance metrics. We’ll also see increased demand for verifiable and comparable data between companies and over time. As for outputs, more investors are looking to understand how their portfolios are making a difference, requiring meaningful metrics on the social and environmental impacts of their investments.
2. Value of ESG in Fixed-Income Investing
The fixed-income market has begun to embrace well-established principles and practices of sustainable investing, and debt investors are starting to engage with companies on ESG issues. PIMCO, one of the largest fixed-income investors in the world, has become vocal about its desire for bonds that support the UN Sustainable Development Goals.
The fixed-income industry also increasingly recognizes that ESG performance can affect investment quality. Credit-rating agencies, for example, are looking at ESG performance as an indicator of risk. In fact, Moody’s announced in late 2017 that it would begin to factor ESG into its credit ratings.
3. Sustainable Bond Innovation
Green bonds have put down roots, with new issues surpassing $150 billion in 2017. 1 Now, bond issuers are going beyond “green” and are using bonds to more creatively integrate sustainability into business strategy and signal their values. Following on innovations, such as the Starbucks sustainability bond addressing social and environmental sustainability in the coffee supply chain, we expect more issuers to think creatively about how they will use proceeds to drive impact across their operations and value chains.
4. Democratizing Access
As more investors move from interest to action, we’ll continue to see new and more accessible sustainable investing products. We’ve already seen growing attention from different geographies, investor types, and generations. In particular, younger investors demand sustainable investment products at record numbers. A 2017 survey by Morgan Stanley’s Institute for Sustainable Investing found that 86% of millennials are interested in sustainable investing.
New products are cropping up to meet that demand. In 2017, Morgan Stanley introduced new investment portfolios with minimums as low as $5,000, with products tailored to social and environmental impact.
5. Corporations Step Up on ESG
Investor demand for more and better data will persuade more companies to position sustainability as part of their corporate strategy. Investors increasingly ask the companies that they invest in to demonstrate long-term thinking and to consider the mark they make on the world, recognizing that financial performance and sustainability aren’t a zero-sum game. Companies must consider how their core business practices influence society, and they also can’t ignore the rise of ESG activism in their own boardrooms—in 2017, the nonprofit organization Ceres tracked more than 200 shareholder resolutions on ESG topics, up from 130 in 2013. 2