Morgan Stanley’s Investing with Impact Approach

The US State Department is working to accelerate practices and thinking around the impact economy—an economy in which government works with civil society and the private sector to create positive social and environmental impact while generating economic value. The following article is part of a series written by participants in Secretary of State Hillary Clinton's Global Impact Economy Forum in Washington, DC, April 26-27.

From the earliest days of socially responsible investing, a group of investors—first small in size, then steadily growing—demanded something more from their money, seeking not just financial returns, but also requesting certain social or environmental criteria. In recent years, the impact investing movement has significantly upped the ante, to focus on deploying capital with the specific goal of advancing positive social and economic outcomes. But whatever one’s approach to socially responsible investing or impact investing, one clear consensus exists—namely the conviction that private sector capital and the capital markets are increasingly critical to provide scale, speed, and leverage to solving the complex, large-scale challenges facing the global community today. 

Presented with that challenge, we believe that there is benefit in a broad-based investment approach that seeks to reach the largest possible group of investors and to attract as much capital as possible into investments that target positive environmental and social impact. At Morgan Stanley, we deliberately define this range of opportunities as investing with impact, an investment approach that aims to generate risk-adjusted financial returns while supporting positive environmental and/or social impact.

Already, nearly one in eight dollars under professional management in the United States—or about $3.07 trillion, according to US SIF (The Forum for Sustainable and Responsible Investment)—now follows investment strategies that consider corporate responsibility and societal concerns in some form. We believe that engine for positive change can continue to grow and become much more powerful, as we identify more investment opportunities that provide attractive, appropriate, accessible opportunities for the broadest possible base of investors across a wide spectrum of individual liquidity needs or risk appetites.

Investors contemplating the adoption of an investing with impact approach must be clear about individual priorities. They should weigh:

– Individual goals and values, including specific thematic or sectoral interests, preference for proximity to impact, and their desire for the specific reporting of an investment’s social or environmental impact; and

– Investment considerations, including both product specific (for example, investment strategy, team, track record, investment minimum, and expenses) and individual investment (for example, liquidity, return targets, and risk tolerance) needs.

Identifying opportunities that fit an investor’s goals from both a financial and societal perspective can be challenging. Investing with impact opportunities vary widely in terms of strategy, risk, and return potential, with some products offering a concessionary return and others targeting competitive financial returns. It is important for investors to focus on understanding the financial integrity, return potential, and impact philosophy for each potential investment opportunity and to ensure that these are aligned with their individual goals.

To help provide clarity to our clients, we created an Investing with Impact framework, which encompasses four different approaches: Values Alignment; Environment, Social and Governance (ESG) Integration; Sector Exposure; and Impact Investing. The first three categories involve investments in public equity and public debt, while the fourth category, Impact Investing, involves investments in private equity and private debt. Moving from one category to the next, the impact becomes increasingly specific, overt, and explicitly integrated into the product offerings.

• Value Alignment – Screening by interests and values to avoid investments in potentially “objectionable” companies and industries, but not actively seeking social and environmental impact.
• Environment, Social, and Governance (ESG) Integration – Identification of managers who target companies whose approach to environmental, social, or governance issues creates value differentiation.
• Sector Exposure – Focus on themes and sectors targeting specific environmental or social change.
• Impact Investing – Participation in investment funds that are focused on providing capital directly into private enterprises structured to effect positive social or environmental change.

Investing with Impact reflects our firm’s commitment to sustainability and is a response to the market’s demand for greater private capital investment in social and environmental improvement. In leading with the broader perspective, Morgan Stanley seeks to help more investors move down the path of considering impact in their investment decisions and thereby attract more capital to address critical global issues.

While investors increasingly seek to use their investments to achieve positive societal impact, government has long played an important role in addressing the world’s most pressing challenges. Today, more than ever, government can unlock new sources of funding to tackle social and environmental issues. Public capital can help support investments that otherwise might fail to find the necessary financing from private investors, because they are perceived as too risky or challenging. Blending capital from investors with different motivations and expectations can help investors who seek market rate returns as well as those whose emphasis is on the social impact. This public-private partnership can enable government to leverage its capital investment and achieve significantly more impact than it would on its own. We’ve seen many examples where this investment partnership has succeeded, such as Small Business Administration loan programs, renewable energy tax credits that stimulated clean energy investment, and the Overseas Private Investment Corporation (OPIC) helping to support investment abroad through lending and loan guarantees.

Over the past few years, the number and quality of financially attractive investment vehicles that also aim to support positive impact has increased dramatically. Coupled with increasing investor interest, this has created an exciting opportunity for firms like Morgan Stanley to develop and offer solutions that meet today’s global challenges.

The views expressed herein are those of the authors and do not necessarily reflect the views of Morgan Stanley or its affiliates. All opinions are subject to change without notice. Articles are published for general information purposes and are not an offer or a solicitation to sell or buy any securities or commodities or to participate in any investment strategy. Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives and we encourage investors to seek the advice of financial, legal, accounting, and tax advisors. Past performance is no guarantee of future results.

Read more stories by Audrey Choi & Hilary Irby.