Millennial investors are bringing increased attention to sustainable, responsible and impact investing—and it may be creating opportunities for investors of all ages.
Is Millennial interest in sustainable, responsible and impact investing driving increased opportunities for investors as a whole?
Sustainable, socially responsible or ESG (environmental, social and governance) investing—representing different approaches to Investing with Impact—has been gaining traction with investors of all ages, as many look to generate market-rate financial returns alongside positive social and environmental impact. But it’s among Millennials where a preference toward this dynamic investment approach is more prevalent.
According to research conducted by Morgan Stanley, 86 percent of Millennials—broadly defined as those born between the early 1980s and 2000—say they are interested in socially responsible investing. Millennials are also twice as likely to invest in a stock or a fund if social responsibility is part of the value-creation thesis.
With Millennials taking the reins as the largest demographic in America— by 2020, one in three U.S. adults will be a Millennial—the growing interest in Investing with Impact among this cohort cannot be ignored. However, most sustainable investing opportunities are perceived to cater to individuals with significant wealth, while Millennials are still early in earning years. In response, Morgan Stanley is launching the Impact Access Model Portfolios to provide access to diversified investments with reduced account minimums.
A Growing Range of Approaches
Increased interest in Investing with Impact may stem in part from the ongoing evolution of these kinds of investments over the last decade. Early approaches often simply screened out so-called “sin stocks" such as tobacco or weapons. Today's sustainable portfolios can be far more sophisticated.
“Sustainable investing now encompasses a wide range of factors, from environmental impact to gender and diversity," says Lily Trager, Director of Investing with Impact at Morgan Stanley. “These funds don't simply avoid bad actors; by allocating assets to companies that perform high on ESG factors and, in some cases, use their leverage as shareholders, they can be catalysts for positive corporate change."
The Investing with Impact Platform has responded to the growing demand with thematic approaches focused on faith-based, fossil fuel aware and gender diverse investing. By adopting a flexible platform, Investing with Impact empowers each client to align their investments with their own unique values and mission.
Proof is in the Performance
Millennial interest in Investing with Impact comes at a time where evidence of the performance potential of these types of investments is more readily available. As recently as a few years ago, sustainable investing still carried the stigma of positive change at the cost of performance. But several factors are changing this perception.
A 2015 study from the Institute for Sustainable Investing examined performance data from 10,228 open-end mutual funds and 2,874 separately managed accounts over seven years and found that investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments, both on an absolute and a risk-adjusted basis, across asset classes and over time. The study also showed lower median volatility for the funds and SMAs studied since companies that score well on ESG also tend to be less vulnerable to negative headline risks, large-scale lawsuits or environmental risks.1
“Data shows that environmental, social and governance issues can be material risks and opportunities for investors," says Audrey Choi, CEO of the Institute for Sustainable Investing at Morgan Stanley, adding that U.S. assets managed with sustainable investing criteria have increased more than 135% since 2012.
As more investors and consumers—particularly Millennials—put real focus on how companies stack up on environmental, social and governance criteria, these factors influence markets, and by extension, business. “Many investors are looking for ways to invest along with their values and to incorporate sustainability issues into their portfolios, and Morgan Stanley is very focused on providing actionable solutions for our diverse client base," Choi adds.
Matching Interest with Investment Solutions
With over 140 products currently on the Investing with Impact Platform, investors are seeing increased options to enter the sustainable investing space. In Morgan Stanley's view, there is no single motivation to pursuing Investing with Impact and certainly more than one approach to implementing. The challenge has been creating opportunities for less established investors.
In response to the increasing demand for more accessible sustainable investing products, Morgan Stanley Wealth Management recently began offering two “Impact Access Model Portfolios” with reduced account minimums of $10,000.
These mutual fund and ETF portfolios—one focused on equity and one that blends stocks and bonds—are based on Morgan Stanley's proven Investing with Impact UMA Portfolios, which leverage Morgan Stanley's expertise in portfolio construction, investment manager evaluation and ESG accountability.
“Our aim is to help investors find the right balance of social impact and investment outcomes by identifying high quality mutual funds and ETFs, and creating portfolios that make sense," says Hilary Irby, head of Morgan Stanley's Investing with Impact Initiative. “We're excited that we can make these solutions available to younger investors, many of whom want to invest sustainably but in a way that is simple and effective."
1 Source: Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies http://www.morganstanley.com/sustainableinvesting/pdf/sustainable-reality.pdf
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Investing in the market entails the risk of market volatility. The value of all types of investments may increase or decrease over varying time periods.
Fixed Income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall. To the extent the investments depicted herein represent international securities, you should be aware that there may be additional risks associated with international investing, including foreign economic, political, monetary and/or legal factors, changing currency exchange rates, foreign taxes, and differences in financial and accounting standards. These risks may be magnified in emerging markets and frontier markets.
The returns on a portfolio consisting primarily of ESG investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.
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