NEXTGEN

A Conversation on Climate Change & Sustainable Investing

Sustainability is a top priority for many young investors who want to align their portfolios with their values. While Morgan Stanley has long been a leader in sustainable investing, the Firm made some significant commitments this year when it comes to addressing climate change and environmental impacts. Mandell Crawley, Head of Private Wealth Management at Morgan Stanley, sat down with Matthew Slovik, Head of Global Sustainable Finance at Morgan Stanley, to learn more about the Firm’s efforts and discuss how the members of our NEXT community can get involved.

Mandell Crawley: Earlier this year, Morgan Stanley was the first major U.S. bank to commit to publicly disclose its net financed emissions—in other words, how much its loans and investments contribute to greenhouse gases warming the atmosphere.¹ Why does the Firm believe it is so important to measure this?

Matthew Slovik: Morgan Stanley is committed to taking a leadership role on climate change. The science is clear that climate change represents an environmental, social and economic reality demanding urgent attention – and, more specifically, that global greenhouse gas emissions must dramatically decrease in order to limit global warming and avoid the worst projected impacts of climate change.

Guided by this scientific reality – and building on the Firm’s prior commitments to reach carbon neutrality across our global operations and to catalyze $250 billion in financing for low-carbon solutions – Morgan Stanley became the first major U.S. bank to commit to reaching net-zero financed emissions by 2050.² We also became the first major U.S. bank to join the global Steering Committee of the Partnership for Carbon Accounting Financials (PCAF), a collaboration seeking to standardize carbon accounting for the financial sector.³ We believe the Firm has a role to play in enabling a harmonized approach to the assessment and disclosure of greenhouse gas emissions financed by loans and investments.

Mandell: What are some of the trends in sustainable investing you are most excited about?

Matthew: Globally, we have continued to see strong growth and demand for sustainable investing. According to data from Morningstar, ESG funds globally have now surpassed $1 trillion in assets. In a recent analysis by the Morgan Stanley Institute for Sustainable Investing, U.S.-based sustainable equity funds outperformed their traditional peers by a median of 3.9% in the first half of 2020. These findings build on a growing body of work that shows how sustainability considerations can be material to investment and business decisions, even in the most volatile and uncertain markets.

From a thematic perspective, we are seeing growing investor demand – and an expanding set of investment solutions – to address climate change, plastic waste reduction, and gender and racial equity. Helping to advance each of these sustainable investment themes is a proliferation of high quality environmental, social and governance (ESG) data, which represents an opportunity to better serve and inform our clients. For example, in 2019, we launched Morgan Stanley Impact Quotient® (Morgan Stanley IQ), a proprietary impact reporting application that allows clients of Morgan Stanley Wealth Management to prioritize from among 100+ social and environmental impact objectives, and evaluate the alignment of their portfolios with those unique preferences.

Mandell: How might Morgan Stanley IQ empower investors to align their investments with their values?

Matthew: Morgan Stanley IQ provides a new lens with which to view investment portfolios and is designed to put our clients’ impact preferences at the center of the equation. Supplementing traditional financial reporting and analysis, Morgan Stanley IQ can provide transparency and suggestions across multiple dimensions of impact. These include exposure to sectors, issues or business practices that an investor may seek to avoid – for example, the sale of tobacco or firearms – as well as alignment with positive social and environmental outcomes – for example, companies that provide access to healthcare or are working to reduce their carbon footprint.

Mandell: What can individual investors do to manage risks associated with climate change in their investment portfolios?

Matthew: As the Morgan Stanley Institute for Sustainable Investing explored in a recent report, direct and indirect impacts from climate change span physical and transition risk dimensions. Physical climate risks result from extreme weather events and changes in natural cycles, whereas transition risks, encompass shifts in policy and technology that enable a transition to a low-carbon economy.

When it comes to transition risk, many investors are taking a closer look at minimizing exposure to companies with high greenhouse gas emissions or that own significant fossil fuel reserves, among other examples. By working with a Morgan Stanley Financial Advisor – and supported by applications like Morgan Stanley IQ – investors can prioritize their specific climate change goals and identify a range of climate-oriented investment solutions.

Mandell: Why do you think sustainable investing is such a priority for younger investors?

Matthew: According to a survey conducted by Morgan Stanley’s Institute for Sustainable Investing in 2019, 95% of millennial investors are interested in sustainable investing, up 9% from 2017. This trend reflects a broader shift in how younger generations view their role in society, including where they want to work and spend their money. When asked about transparency, 91% of millennial respondents expressed interest in an impact report that tracks social and environmental return on their sustainable investments. Underlying this desire to better understand performance and track progress towards impact goals is a broader trend towards more sustainable lifestyle choices, like using less single-use plastic and eating more locally-sourced food or plant-based protein.

Mandell: Sustainable Investing can be a powerful bridge to connect generations and spark discussions around shared family values and legacy. How have you seen sustainable investing bring multi-generational family members together?

Matthew: Sustainable investing can be a natural bridge for next generation wealth holders to take an active role in investing, and potentially help expand investment decision-making to include a broader set of environmental, social or ethical values – above and beyond a family’s philanthropic activities. Opening a dialogue around sustainable investing may be an opportunity for older generations to initiate conversations about family legacy and succession planning.

Mandell: What are some examples of ways young investors are addressing climate change in their portfolios?

Matthew: Next gen investors are often globally-minded and forward-looking. As a result, many are approaching climate investing with a critical eye on solutions. What are the key technologies and innovations needed to accelerate the transition to a global low-carbon economy? Which companies are developing the products and services to lead that transition? At the same time, many next gen investors also recognize the complexities of climate change and its social implications – such as the expected growth in climate refugees and global wealth disparities. As a result, they are looking for investment solutions that take a holistic view of climate change and its broader impacts, and approach climate-related investment opportunities with an eye on authenticity, innovation and inclusivity.