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Morgan Stanley: Aligning Financial Returns with Impact Objectives

Submitted by: Kelly Eisenhardt

Posted: Jun 27, 2016 – 06:00 AM EST

Tags: impact investing, sri, socially responsible investing


The impact investment community continues to grow and the need for increased capital to fund sustainability based investments is at an all-time high. Investors are searching for a way to align their financial returns with their impact objectives.

Lily Scott Trager is the Director of Investing with Impact for Morgan Stanley Wealth Management.

What is the Climate Change and Fossil Fuel Aware Investing Tool Kit?

The Tool Kit is designed as a roadmap to provide historical context and background on climate change and fossil fuels and the investment implications. Further, it seeks to help clients manage their portfolio in a way that aligns with their personal interests and financial goals, as well as mitigate climate change and fossil fuel use. The roadmap helps investors build action plans that are most suitable to their risk level and to create a diversified portfolio.

What the Climate Change and Fossil Fuel Aware Investing Framework?

Part of the roadmap includes a Framework for how investors can think about the range of approaches to achieving a climate change and fossil fuel aware portfolio.  The Framework includes four key strategies: Fossil Fuel Aware which means to eliminate or reduce exposure to companies that produce coal, oil or gas; Environmental Leaders which means to invest only in companies that reflect the best environmental practices relative to peers potentially even in the energy sector; Thematic Opportunities which focuses on investable themes that seek to improve climate change mitigation or adaptation solutions and Shareholder Engagement which is the process of driving positive environmental change through active dialogue with companies in which clients are invested. 

Are there multiple approaches to how an investor can use this Framework?

If investors are already Morgan Stanley clients, we suggest that investors work with their advisor to incorporate their financial objectives with their impact objectives. The Tool Kit helps facilitate those conversations.

Clients also have access to portfolio managers and third party managers who can help them develop a custom strategy, as well as advise on their behalf.

What are the benefits of using this Framework when reviewing or expanding an investor portfolio?

There are several different approaches a person can take when activating a portfolio for climate change and fossil fuel awareness.

Total portfolio activation, whereby investors can design their entire portfolio across public equity, public fixed income and as appropriate private alternatives to integrate both their financial and climate change and fossil fuel aware objectives.  Climate change and fossil fuel aware investing across the entire portfolio requires advisors to understand the client’s objectives and understand which approaches across the Framework to achieve financial objectives will work over time.

This activation requires an assessment of the current portfolio’s exposure to climate change and fossil fuels, along with defining any limitations, such as investments in comingled funds that may limit implementation options. The approach, using the Framework, is then defined and the portfolio is then monitored on a continual basis.

Another way this can be done is as a partial asset class or subclass or percentage of the portfolio used to create the climate change and fossil fuel aware investing strategy. This does not leverage all assets in the portfolio but only a specified portion.

Why did Morgan Stanley develop a Tool Kit that helps investors look more closely at issues like environmental impact, climate change, and fossil fuel use?

The Tool Kit is the second in a series of Tool Kits which are part of Morgan Stanley’s Investing with Impact Platform.  The Tool Kits are meant to help empower investors to align their investment portfolio with their values, mission and impact objectives across a number of themes. As part of the Climate Change and Fossil Fuel Aware Toolkit, we have written a primer that explains the risks and opportunities involved in climate change and fossil fuel aware investing, along with what we see as a systematic approach to addressing these risks and opportunities in the context of an investment portfolio. The key is to look at the spectrum of approaches outlined in the Framework from a portfolio perspective and be aware of the changing marketplace of investable options. As outlined above, the Framework provides a guideline for fossil fuel aware investors, environmental leaders, theme based opportunities and shareholder engagement.

What indicators validate that governments, corporations, and investors are taking these issues seriously?

Many recent events, such as COP21, the Pope speaking clearly about climate change and its effect on the poor, and domestic legislation regarding carbon taxes and rebates for wind and solar, are leading to a broader ecosystem awareness and actionable climate change strategies. Not to mention leaders speaking out about carbon emissions and resource efficiency as part of a prudent business model.

We are definitely seeing demand from investors to provide more metrics and identify risks in these areas. According to our Sustainable Signals report, seventy-one percent (71%) expressed interest in sustainable investing and we are working to help the flow of capital towards sustainable investments.

What are the risks associated with not addressing a portfolio’s exposure to climate change and fossil fuel challenges?

When investors are looking at the risks, they want to understand if and how those risks can be mitigated. They also want to understand the risks of unburned carbon reserves that might become a burden on the balance sheet. Some investors may take a different approach and want to invest in companies that they see as leaders in the field. They might be seeking to avoid things like droughts and water scarcity. Maybe it is a review of the possible risks when a policy is not in place.

We look at investments from a thematic exposure. In other words, directing a portfolio toward holdings that seek to address climate change in the context of their whole portfolio. That might be one of many themes focused on water, agriculture, or infrastructure.

Do you have any recommendations for investors wanting to review their portfolios in this context and how can they learn more?

People can learn more about thematic portfolios, climate change and fossil fuel exposure by going to our website and reviewing both the Wealth Management primer and the Institute for Sustainable Investment issue brief on the theme.

The key learning is to create a portfolio that aligns with not only your financial objectives but also your impact objectives including thematic goals such as climate change and fossil fuel aware investing.  

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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