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Sustainable Investing
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March 01, 2020
A Multi-Asset ESG Solution
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March 01, 2020

A Multi-Asset ESG Solution


Sustainable Investing

A Multi-Asset ESG Solution

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March 01, 2020

 

Overview

“The newest frontier of environmental, social and governance investing—commonly referred to as ESG—is the development of highly tailored multi-asset-class portfolio solutions that address a client’s unique financial and impact needs,” says Rui de Figueiredo, CIO of Morgan Stanley Investment Management's Portfolio Solutions Group (PSG). In early 2017, de Figueiredo and his team were able to put this practice to work on behalf of a newly established woman-led family office client.

 

With $500 million in assets to invest, the client sought to achieve returns that would finance both short-term and long-term income needs and charitable endeavors.  In addition, through the investments within the portfolio, the client sought to make a positive social impact in the areas of environmental protection, education and equality.

 

“The family office selected Morgan Stanley Investment Management not only for our investment expertise," says de Figueiredo, "but also for our ability to help them take the critical first steps towards achieving their philanthropic objectives.”

 
 

Optimizing Risk, Reward and Impact

After arriving at a portfolio target return of cash plus 4% net of fees, the PSG team proceeded to develop a strategic asset allocation model that was diversified across both public and private asset classes.1  Given the client’s long-term investment horizon, the team sought exposure to alternative investments such as private equity, real assets, private credit and opportunistic hedge funds that have the potential to deliver an illiquidity premium and generate high alpha.  Allocations to more liquid asset classes; such as equity and fixed income, seek to provide the client with steady income and the flexibility to fund philanthropic activities on both a regular and ad hoc basis.

At the implementation stage, the PSG team looked for investments within each asset class that would advance the client’s ESG goals.  Examples include creating equity baskets that score well on ESG factors based upon the team’s proprietary metrics, selecting hedge funds managed by women and minorities and allocating to private equity and real asset funds with an impact orientation that aligns with the client's areas of interest.  “Rather than apply a broad-based ESG overlay to the portfolio, we flipped the process on its head,” says de Figueiredo. “We were able to address the client’s ESG preferences at a granular level within each component of the portfolio.”

In addition to voting with their dollars, investors can also make an impact by engaging with companies on specific policy matters. The PSG team enlisted Investment Management's Global Stewardship team to help them initiate a dialogue with public companies about family leave, an issue of particular concern to the client.  As de Figueiredo notes, “By drawing upon the expertise, resources and network of the stewardship specialists within our organization, we were able to amplify the client’s voice on this important topic.”

Outcome

By considering the client’s financial and impact objectives in a holistic manner the PSG team was able to craft a highly tailored solution that incorporates ESG principles at every level of the portfolio. As de Figueiredo notes, "we are pleased that we enabled our client to achieve a greater understanding of the power of both their capital and corporate engagement to generate meaningful social and financial returns."

 
Pie Chart
private markets public markets hedge funds

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4% target return and positive impact
Environment
Education
Equality

Dollar for dollar, investors can often make the most impact by investing in private companies and real assets, either directly or via private funds. Not only can a relatively small amount of capital move the needle for fledgling companies, private investors can often take an active role in shaping business decisions.

In alignment with the client’s interest in environmental causes, the private markets investment program focused on areas such as organic farmland, renewable energy, water infrastructure, and recyclable plastic. The PSG team gained exposure to these opportunities through direct fund investing, secondaries and co-investments.

The PSG team screened individual stocks using multiple environmental and social factors to develop three custom equity baskets: US large cap, US small cap and international equity. “On average the overall ESG score of each of our baskets is 30% higher than its associated industry benchmark,” notes de Figueiredo.

After assessing the hedge fund universe, the PSG team determined that the best way to balance the client’s ESG preferences and return objectives was to devote a meaningful portion of the hedge fund allocation to women- and minority-owned general partners. “In many instances the client is helping to seed these funds,” says de Figueiredo.

Source: Morgan Stanley Investment Management as of January, 2020. For illustrative purposes only.

Past performance is not a guarantee of future results.

 

1 Diversification does not eliminate the risk of loss.

 
 
Pioneers in the area of custom multi-asset-class portfolio management and dedicated to helping institutions and individuals achieve their investment goals. The group is distinguished by its depth of expertise, state-of-the-art investment processes and access to the extensive resources and intellectual capital of Morgan Stanley.
 
 
 
 

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