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Investors want sustainability, but how can they measure impact?

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Sustainable investing is redefining the traditional investing landscape. Investors have established their interest, and are now asking how their investments are making a positive impact.


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Author
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Audrey Choi,
Chief Sustainability Officer and Chief Marketing Officer, Morgan Stanley

In 2009, when Morgan Stanley established a new team focused solely on sustainable investing, it was a nascent field. A decade later, however, sustainable investing is redefining traditional investing. At $30.7 trillion, sustainably managed assets now account for roughly 1 in 3 dollars under professional management globally[1], and 85% of individual investors in the United States now express an interest in sustainable investing. [2] Yet there is still work ahead. Despite mounting evidence to the contrary, there are still investors who believe that sustainable investing entails a financial trade-off; and, until recently, investors’ ability to assess the social and environmental impact of their investment choices has been limited. 

Fact or fiction?

It’s now time to stop questioning the financial case for sustainable investing. Numerous studies, including a recent report from the Morgan Stanley Institute for Sustainable Investing, have shown that there is no financial returns trade-off for sustainable funds compared with their traditional counterparts. In fact, looking at nearly 11,000 mutual and exchange-traded funds over the last 15 years, Morgan Stanley saw that sustainable funds may be less risky – on average, the downside deviation of sustainable funds is 20% smaller than traditional funds. [3]  

Individual investors in Morgan Stanley’s most recent survey seemed to grasp this reality, feeling much more strongly about the financial case for sustainable investing than about the trade-off myth. Eighty-six percent said that companies with strong environmental, social and corporate governance (ESG) practices may be better long-term investments, and 88% said it’s possible to balance returns and impact. [4]   Looking beyond questions about the financial case for sustainable investing, investors are now asking how their investments are making a positive impact.

What’s in your portfolio?

The social and environmental challenges facing our society have never been more numerous, more urgent or more relevant to investment decision-making. Meanwhile, the opportunities to deploy private capital toward solutions are growing every day and in every asset class. Against this backdrop, investors are seeking out investment products and solutions that can be tailored to the issues they most care about. 

In order to do so, investors need to define their goals. For example, what does sustainability mean, and what impact is most significant? Plastic reduction, climate change and community development rank among the top issues investors say they care most deeply about. And they have a sense of agency in their investments. Nearly three-quarters say their investment decisions can influence climate change and 84% believe their choices can help alleviate poverty. [5] 

Once an investor has defined sustainability for themselves, they’ll want to know how well aligned their investments are with those goals. With the proliferation of ESG data, there’s more information at an investor’s fingertips than ever before, yet most of it is specific to individual securities or funds. What’s more, most managers don’t provide impact information to their clients, even though 84% of individuals say they would be interested in receiving an impact report alongside other reports and statements. [6] For an investor with a diversified portfolio, piecing together disparate information fails to bring the full picture into view.

This lack of information has made it challenging for anyone but the most sophisticated investment professional to understand impact. Even with a clear picture of impact objectives, without reliable data, investors are hard pressed to make choices that bring their objectives and their holdings into alignment, even though 84% say they want to be able to do so. [7]

Data, data everywhere

The proliferation of ESG data has been a boost to the field of sustainable investing, but for most investors it’s too fragmented to guide decision-making, and aggregate ratings and rankings use too broad a brush to paint an accurate picture of impact. Morgan Stanley is seeking to address this challenge with the introduction of a new technology solution, Morgan Stanley Impact Quotient™.

Morgan Stanley IQ puts a client’s unique preferences at the center of impact analysis by providing a framework to identify and prioritize sustainability objectives, instantly assessing alignment of investments with those preferences using multiple third-party data sources and proprietary analytics, and equipping Morgan Stanley Financial Advisors with suggestions for investment solutions that enhance impact alignment. 

By sharpening the focus on impact, this new tool aims to equip investors with the insights and information they need to accelerate the shift toward a more sustainable economy. Looking ahead to the next decade, sustainable investing is positioned for continued growth and the step from fostering interest in to the adoption of sustainable investing practices will only continue to narrow. 

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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. Morgan Stanley Smith Barney LLC (“Morgan Stanley”) recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Morgan Stanley Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.

The returns on a portfolio consisting primarily of Environmental, Social and Governance (“ESG”) aware 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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[1] Global Sustainable Investment Alliance, “2018 Global Sustainable Investment Review”, 2019, http://www.gsi-alliance.org/wp-content/uploads/2019/06/GSIR_Review2018F.pdf.

[2] Morgan Stanley Institute for Sustainable Investing, “Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction and Choice”, Sept. 2019.

[3] Morgan Stanley Institute for Sustainable Investing, “Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds”, August2019, https://www.morganstanley.com/pub/content/dam/msdotcom/ideas/sustainable-investing-offers-financial-performance-lowered-risk/Sustainable_Reality_Analyzing_Risk_and_Returns_of_Sustainable_Funds.pdf.

[4] Morgan Stanley Institute for Sustainable Investing, “Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction and Choice”, Sept. 2019.

[5] Ibid.

[6] Ibid.

[7] Ibid.

© 2019 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 2707861 09/19

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