The world’s population is expected to increase by as much as 33 percent by 2050. In a few decades, there may be an additional 2.5 billion consumers utilizing the same essential resources we depend on today. At the same time, demand for these resources is expected to rise at an even faster rate, as people around the world strive for higher living standards. The global need for food, water, and energy is projected to increase by 60, 55, and 80 percent respectively.
Clients frequently ask how they can leverage their investment assets in a manner that addresses some of these important global challenges. These investors want to achieve a positive financial return, and at the same time have a significant impact on social and environmental issues. This practice is commonly called sustainable, mission-aligned, or impact investing.
Sustainable investing is a way to mobilize capital to meet the challenges and opportunities of the future. Most sustainable investors seek to align their financial investments with their unique mission and individual values.
The concept has been around for decades, but has really taken off in recent years. In fact, a 2017 report from the Morgan Stanley Institute for Sustainable Investing shows that this type of investing has experienced a 135 percent increase in assets under management since 2012. While it is difficult to pinpoint a single catalyst behind the growth of sustainable investing, the practice offers a compelling opportunity for the average person, or institution, to position their money in a manner that advocates for certain ideals and influences important decisions.
Investors often ask whether they have to meet a certain asset threshold to qualify. The answer is no. There are many ways people can invest in funds or strategies designed to make a difference. In fact, millennials — most of whom have not yet hit their peak level of wealth — as well as women, are two primary driving forces behind the sustainable investing movement.
Incorporating Sustainable Investments Into Portfolios
Often, the sustainable investing conversation begins with a question: “What is the change I’m hoping to make?”
Everyone looks at the world through a different lens — from those worried about the environment and climate change, to those looking to create opportunities for women and minorities. Others are passionate about supporting underserved and marginalized populations by providing education, affordable housing, and economic development.
Those interested in sustainable investing should work to position their portfolios in a manner that drives positive impact through their investments, while seeking to achieve a market-rate financial return. One Morgan Stanley study, which looked at more than 13,000 different investment funds over seven years, found that funds incorporating Environmental, Social and Governance (ESG) criteria met or exceeded the returns of their peers roughly 64 percent of the time.
Every day, new investment products are becoming available for aligning an investment program with individual or organizational values — funds designed to help promote environmental sustainability, gender equality, and poverty alleviation initiatives, among others. For example, those concerned about depleting natural resources might look to make an investment in companies fostering solar, wind, and other renewable power projects. Or, someone interested in improving global access to drinking water may invest in companies striving to improve the efficiency and quality of water supplies.
By elevating the overall importance of social responsibility when making investment decisions, individuals and organizations can support and complement the efforts of those seeking to realize a vision for a more harmonious world.
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Linda Stephans is a Managing Director and Institutional Consulting Director with Graystone Consulting, a business of Morgan Stanley in Chicago. The information contained in this column is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Morgan Stanley Smith Barney, LLC, member SIPC.
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.