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Sustainable Investing
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May 26, 2020
Asset Owners See Sustainability as Core to the Future of Investing
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May 26, 2020

Asset Owners See Sustainability as Core to the Future of Investing


Sustainable Investing

Asset Owners See Sustainability as Core to the Future of Investing

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May 26, 2020

 

Asset owners worldwide now routinely incorporate environmental, social and governance (ESG) factors in their decision-making. In a decisive shift toward the adoption of sustainable investing, four in five institutions surveyed are currently integrating ESG considerations into the investment process. Moreover, 57% foresee a time when they will only allocate to third-party investment managers with a formal ESG approach. These are among the key findings of Morgan Stanley’s second Sustainable Signals survey of institutional asset owners. As sustainable investing grows more sophisticated, asset owners also seek better tools and data to measure their social and environmental impact.

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Asset owners increasinglyembrace sustainable investing

The survey results indicate that asset owners are adopting sustainable investing in record numbers. Eight in ten actively integrate ESG factors into the investment process across the board or in part of their portfolio—up 10 percentage points in two years. A further 15% are considering doing so. Not only is sustainable investing now mainstream, but 57% of asset owners foresee a near future where they will limit allocations to managers with a formal ESG approach. Among this group, 42% expect to change this selection criteria within two years and 39% within five years.

Is sustainable investing integrated into your investment process?

Many factors are fueling adoption. Frontrunners include constituent demand (81%), financial return potential (78%) and evolving policy and regulation on ESG disclosure around the world (76%). Asset owners who already practice sustainable investing identify clear benefits to reputation and stakeholder engagement, as well as improved environmental and social outcomes where measured.

What is driving asset owners to adopt sustainable investing? (n=87)

What benefits are asset owners observing from adopting sustainable investing? (n=84)

  • Reputational benefits
  • Improved stakeholder engagement
    (e.g., employee retention)
  • Enhanced environmental /social outcomes, where measured
    (e.g., carbon footprint)
  • Enhanced financial performance (e.g., lower risk, higher return)
  • Other

Asset owners seek better tools and data to measure sustainability

Asset owners are eager to measure and report portfolio impacts, but nearly a third (31%) lack adequate tools to assess how investments align with their ESG goals. Overall, the lack of quality data is now viewed as the most significant barrier to sustainable investing. Asset owners are looking to third-party research and ratings, rankings and data providers to help fill these gaps, but may not be able to source the data they need given ongoing data quality challenges.

My organization has adequate tools to assess the alignment of our investments with our sustainable investing goals

Data quality remains a top challenge for those adopting or considering sustainable investing (n=77)

  • Quality ESG/Sustainability Data
  • Proof of Market-Rate Financial Performance
  • Lack of Knowledge About Sustainable Investing
  • Supply of Quality Managers /Strategies
  • Policy/Regulations
  • Internal Disagreement
  • Stakeholder/ Constituent Feedback

Environmental issues are the top choice for thematic and impact investors

Close to half of asset owners polled (48 of 110) employ thematic or impact investment approaches. The top four issues they seek to address are environmental—climate change, water solutions, plastic waste and the circular economy. For social issues, gender diversity and education are the top priorities.

What matters most to thematic and impact investors? (n=48)

ESG integration remains the most common approach
to sustainable investing

Six in ten asset owners adopting or considering sustainable investing use multiple approaches, but there are clear leaders. ESG integration is employed by nine in ten (92%) survey respondents, including 47% who do so ‘wherever possible across their portfolios’—up from 41% in 2017. Eight in ten (82%) employ exclusionary screening, most commonly for weapons, tobacco and coal.

ESG integration and restriction screening are the most popular sustainable investing approaches (n=67)

  • ESG Integration
  • Restriction Screening
  • Thematic Investing
  • Shareholder Engagement /Activist Approach
  • Impact Investing
Net Use
92% ^
82% ^
70% ^
63% ^
61% ^

Sustainable Investing Approaches Defined

In this survey, sustainable investing approaches were defined as follows:

RESTRICTION
SCREENING

Exclusionary, negative or values-based screening of investments.

ESG
INTEGRATION

Proactively considering ESG criteria alongside financial analysis.

Thematic
Investing

Pursuing strategies that address sustainability trends such as clean energy, water, agriculture or community development.

Impact
Investing

Seeking to make investments that intentionally generate measurable positive social and/or environmental outcomes.

Shareholder Engagement

Direct company engagement or activist approaches.

Investment managers can play a key role in reporting and education

The rapid mainstreaming of sustainable investing presents a clear business opportunity for third-party investment managers. Two-thirds of asset owners (67%) want key stakeholders in their organization to learn more about ESG integration, impact investing and thematic investing. And more than eight in ten (86%) see a role for outside investment managers in portfolio reporting on ESG performance and in sharing expertise on approaches, issues and trends.

Asset owners see growing role for third-party investment managers (n=93)

Third-party investment managers can play a role in helping my organization by:

  • Providing relevant portfolio reporting on sustainability and ESG performance
  • Providing education on ESG/sustainable investing approaches, issues and trends
  • Helping write an appropriate Investment Policy Statement incorporating ESG or sustainable investing criteria

In addition:

  • Key stakeholders in my organization would benefit from learning more about sustainable investing from third-party investment managers
  • Relative to peer organizations, mine is ahead of the game in implementing sustainable investing strategies
  • My organization is satisfied with the response of third-party investment managers to ESG and sustainable investing

Learn more about Sustainable Investing
at Morgan Stanley

 
 
 

Morgan Stanley is the parent company of Morgan Stanley Investment Management Inc. and its affiliates. References to “Morgan Stanley” in this document refer to the parent company, not to Morgan Stanley Investment Management Inc. In some instances, Morgan Stanley Investment Management Inc. may leverage or be a part of Morgan Stanley’s processes and/or initiatives related to sustainable investing.

RISK CONSIDERATIONS

ESG strategies that incorporate impact investing and/or environmental, social and governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.

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 values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in a portfolio.

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. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Fixed income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Real estate investments, including real estate investment trusts, are subject to risks similar to those associated with the direct ownership of real estate.

Alternative investments are speculative, involve a high degree of risk, are highly illiquid, typically have higher fees than other investments, and may engage in the use of leverage, short sales, and derivatives, which may increase the risk of investment loss. These investments are designed for investors who understand and are willing to accept these risks. Performance may be volatile, and an investor could lose all or a substantial portion of its investment.

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IMPORTANT INFORMATION

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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 investing, investors should carefully review the strategy’s / product’s relevant offering document. There are important differences in how the strategy is carried out in each of the investment vehicles.

A separately managed account may not be appropriate 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.

The views and opinions are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment teams at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

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 or the investment team. 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.

The description of ESG integration in MSIM’s portfolio management teams represent how the portfolio management teams generally implement their investment process under normal market conditions.

Certain information herein is based on data obtained from third party sources believed to be reliable. However, we have not verified this information, and we make no representations whatsoever as to its accuracy or completeness.

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