Sustainable Investing Themes for 2016: ESG Integration, Climate Change and Inequality
by Audrey Choi, CEO of Morgan Stanley’s Institute for Sustainable Investing
Sustainable investing is gaining momentum and increasingly taking its place at the center of mainstream investment conversations. We believe we are at a critical moment of sea change where integrating environmental, social and governance considerations into quality investment strategies is not only considered acceptable as a part of sound investment management, but is viewed as core to prudent investing and value creation. Growing interest by individual and institutional investors is driving the financial services industry to create ever more numerous and rigorous investment tools. The focus is on utilizing top-drawer traditional investment techniques combined with ESG considerations to provide improved sustainable investing options for investors to consider. As this virtuous circle continues, we believe strong growth in sustainable investing will continue this coming year and beyond as this increasingly sought-after approach is utilized by mainstream investors.
We see three trends in particular to be of special importance:
First, mainstream financial service firms and investors will increasingly look to integrate environmental, social and governance considerations. Research has continued to proliferate, demonstrating more and more proof points that integrating ESG factors into investment decisions does not mean a sacrifice in financial returns. An important milestone came in October 2015 when the Department of Labor changed its guidance for fiduciary investors, clearing the way for prudent investors to consider ESG factors as part of their investment decision process. This decision by the federal government will likely drive fiduciaries that have previously avoided environmental and social considerations as part of their investment mandate to be more open to considering sustainable investing strategies on par with traditional vehicles. Increasingly, the research is proving the case. A 2014 study by Harvard found that firms with good performance on material sustainability issues significantly outperform those with poor performance on these issues. Other studies have shown that companies with strong ESG performance also tend to have lower costs of capital as well as better operational and financial market performance. At Morgan Stanley, we undertook an analysis of more than 10,000 mutual funds, comparing the risk and return of sustainable strategies to traditional strategies over a 7-year period and found that more often than not, the sustainable equity mutual fund strategies had the same or slightly better median returns with the same or slightly lower volatility. As sustainable investment solutions continue to expand across the full spectrum of asset classes, investors of all sizes need help navigating these opportunities. It has been exciting to see the groundswell of major financial firms joining the sustainable investment space, and we expect the trend to continue with others building out their expertise in this area. Earlier this year, Morgan Stanley’s Sustainable + Responsible investment research team published a global framework for analyzing environmental, social and governance risks and opportunities across 29 sectors. We are working to build tools so our clients, whether large institutions or young families, can know exactly what they own and calibrate their portfolios to address the sustainability issues that matter most while enhancing the richness of data they consider to position their portfolios for the long term.
Second, climate change will be a more central focus for investors than ever before. Climate change will crescendo as a topic in the news as nations and corporations make pledges leading up to the UN Climate Change Conference in Paris. Even Pope Francis has added his voice to the chorus, urging policy makers, business leaders, investors and citizens around the world to focus on climate action as a matter of social justice and economic welfare. Climate advocates are catalyzing the conversation on this topic through divestment campaigns, and increasingly corporations, asset owners and asset managers are integrating climate awareness into their risk, opportunity and financial analysis. At Morgan Stanley, our Sustainable + Responsible investment research team is looking at the ways in which environmental factors have material impacts on business. The Sustainability Accounting Standards Board (SASB) recently completed a review in 2015 of 79 different industries and found that climate change will have a material financial impact on 72 of those industries, representing 93 percent of the equity markets or $33.8 trillion dollars’ worth of stock market value. We believe that a critical moment has arrived at which investors must understand climate exposure in their own assets, and take action to address both the risk and opportunity side of the equation.
Third, economic inclusion will become an increasingly important topic for investors – not just policy makers. Despite the remarkable growth we’ve experienced over the past century, we’ve also seen quality of life and economic opportunity for many people decline – both in developing countries and here in the US. In an October 2014 speech, Federal Reserve Chairwoman Janet Yellen warned that beyond the concerns over what inequality means for lower income individuals, the topic is of broader concern to us all. “Inequality of outcomes can exacerbate inequality of opportunity, thereby perpetuating a trend of increasing inequality”, she noted, warning that this cycle can have significant macroeconomic implications for a country’s growth and indeed for economic growth around the globe. The current business-as-usual value chain structures pose mounting challenges for those who have yet to be included in market-based solutions to poverty. Because the poor are disproportionately affected by many environmental and social issues, especially climate change, an enriched understanding of income inequality and of ESG factors is increasingly relevant for strategic investors trying to understand the fundamental macroeconomic risks and opportunities that could affect their investments. Moreover, innovation and entrepreneurship to meet the growing needs of low- and moderate-income communities around the world may provide one of the most significant growth opportunities for investors in the future. Investors focused on understanding the needs of these communities – and how best to meet those needs – will have keen insights into attractive growth sectors for new investment opportunities.
With these drivers at play, more investors understand that traditional indicators of financial performance are too short term and do not adequately account for long term risks and opportunities. It’s clear that the future – notably, the not-too-distant future – will be very different from the past. At Morgan Stanley, we are optimistic that the opportunities outweigh the challenges.
Article by Audrey Choi, CEO of Morgan Stanley’s Institute for Sustainable Investing (www.morganstanley.com/what-we-do/institute-for-sustainable-investing ). She is also Managing Director and Head of Morgan Stanley’s Global Sustainable Finance Group. In these roles, she oversees the firm’s efforts to support resilient communities and promote economic opportunity and global sustainability through the capital markets. In a career spanning the public, private and nonprofit sectors, Audrey has become a thought leader on how finance can be harnessed to address public policy challenges.
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KEYWORDS: Finance & Socially Responsible Investment, Business & Trade, Morgan Stanley, Wall Street, Main Street, inequality, equality, esg, climate change, climate, SRI, impact investing, sustainable investing, women in leadership, invest, Investing, Asian American, financial services, investment firms, fiduciary, ESG INTEGRATION, COP21, Paris, Federal Reserve Chairwoman Janet Yellen, financial performance
Audrey Choi shares her insights
SOURCE: GreenMoney Journal
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