Morgan Stanley
  • Institute for Sustainable Investing
  • Apr 28, 2015

The Business Case for Sustainable Investing

Sustainable investing strategies are gaining momentum, as performance challenges misperceptions.

The global sustainability movement has come a long way in just the last decade, evidenced in part by the ever increasing number of companies and governments actively pursuing sustainability strategies. Despite this, the massive financial investments (think tens of trillions of dollars) necessary to achieve environmentally and socially sustainable business models are somewhat hindered by lingering misperceptions regarding financial returns.

In the world of finance, however, nothing helps dispel a myth quite like a solid business case. “There is a realization that resource scarcity and the incorrect pricing of resources such as water, clean air and soil will ultimately impact business,” says Mindy Lubber, President of Ceres, a nonprofit organization that works with companies and investors to incorporate sustainability into business planning and decision-making. “The connection between environmental, social and governance factors and corporate financial performance is becoming increasingly clear.”

Seeds of realization

Simple math provides part of the rationale for sustainable investing achieving broader recognition. According to United Nations’ studies1, the world will be home to an additional 2 billion people by 2050. Add those 2 billion to the current population, and you have 9 billion humans looking to sustain themselves and improve their quality of life with the same finite resources, and do so amidst increasing demand, according to the National Intelligence Council (a support unit of the U.S. Director of National Intelligence).2

In as little as 15 years, global demand for food will increase by 35 percent,3 with the rise in demand for water at 40 percent4 and energy at 50 percent.5 While there is substantial risk tied to those numbers, there is also considerable opportunity for private sector businesses, as well as institutional and individual investors, to benefit from needed improvements in infrastructure to address the resource demand associated with a growing population. Even if you just consider the basics—clean water and sanitation, innovations in energy generation and distribution, improved healthcare to combat the possible rise in epidemics and the upward trajectory of chronic disease, more efficient transportation—the abundance of opportunity is evident.

“The private sector has a crucial role to play by deploying innovative technologies and developing new business models to meet changing social and economic circumstances,” says James P. Gorman, CEO, Morgan Stanley. “Companies that focus on these challenges will be best positioned for long-term growth; indeed, attempts to quantify the value of sustainable business opportunities yield estimates ranging from $3 trillion to $10 trillion annually by 2050, potentially 4.5 percent of the world’s projected gross domestic product. By harnessing the speed, scale, and efficiency of global capital markets, private sector-led solutions can proliferate and present the best chance of addressing challenges ahead6.”

What’s the Bottom Line for Investors?

While the adoption of sustainable investing strategies are growing, there remains concern among many investors that incorporating environmental social and governance (ESG) criteria into your portfolio means accepting a lower rate of return.

To move past that notion, it’s important to understand that the definition of sustainable investing has nothing to do with philanthropy, nor is it an approach based solely on social or political beliefs. Rather, sustainable investing is the mobilization of capital to businesses that engage in behaviors and practices that achieve ongoing social and/or environmental benefits. It is a smart business strategy that delivers tangible results.

Sustainable equity mutual funds had equal or higher median returns and equal or lower volatility than traditional funds for 64% of the periods examined7

Not only are there trillions of dollars in opportunities for businesses, but countless analyses have demonstrated that sustainable investments deliver competitive returns. A recent Oxford University report, “From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance,” helps to substantiate the intelligent business case for sustainable investing.

The report concludes that stocks of well governed firms perform better than stocks of poorly governed firms. On the environmental dimension of sustainability, corporate eco-efficiency and environmentally responsible behavior are viewed as the most important factors leading to superior stock market performance. On the social dimension, the literature shows that good employee relations and employee satisfaction contribute to better stock market performance8.

This data is supported by Morgan Stanley’s own “Sustainable Reality” report, which analyzed the performance of more than 10,000 mutual funds and found that sustainable equity funds met or exceeded median returns of traditional equity funds during 64% of the time periods examined. Over the longest time period analyzed (seven-year trailing, 2008-2014), Morgan Stanley found that sustainable equity funds met or exceeded median returns for five out of the six different equity classes examined (e.g., large-cap growth)9.

$1 out of every $6 under professional management in the U.S. incorporates SRI strategies10

Momentum in Investing Solutions

While the benefits of sustainable investing strategies seem self-evident, investors might still perceive there to be limited approaches and tools for doing so. However, as the market evolves, more innovative financial products and solutions are becoming available.

The US SIF 2014 Trends report11 reveals that $1 in every $6 under professional management in the U.S. is now aligned with sustainable, responsible and impact investing strategies, and that assets and numbers of funds incorporating ESG criteria have rapidly increased from $1.01 trillion in 2012 to $4.31 trillion, in 925 distinct ESG funds, in 2014.

Still, there remains a need to develop a more diverse range of scalable sustainable investing solutions, an opportunity heeded by Morgan Stanley. Through its Investing with Impact Platform, Morgan Stanley offers a wide range of strategies that aim to generate risk-adjusted financial returns while supporting positive environmental and/or social impact. The Platform encompasses four different approaches that offer varying levels of impact and products spanning fixed income and equity asset classes. To date, more than $4 billion has been invested through the platform by Morgan Stanley clients, with a goal to achieve $10 billion by 2017.

$6.57 trillion of U.S.-domiciled assets under management used SRI strategies in 2014, up from $3.74 trillion in 201212

“For sustainable investing to become a truly mainstream investment approach, there must be a sufficiently broad range of financial products and strategies to support investment along this continuum,” says Audrey Choi, CEO, Morgan Stanley Institute for Sustainable Investing. “Businesses that are pioneering solutions to our global challenges must have capital to grow and expand; portfolio managers and product specialists must have access to data and insight about these businesses; financial advisors must have the knowledge and resources to help their clients incorporate sustainable investing strategies; and sustainable investing products must enable investors to achieve both impact and competitive returns. Realizing these objectives is the Institute for Sustainable Investing’s mandate.”

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