- GIIN: How does Global Sustainable Finance fit within Morgan Stanley's larger practice? What are your key activities?
- Audrey Choi:
Global Sustainable Finance has a firm-wide mandate, so we work on initiatives and objectives across the firm's many divisions and groups. The philosophy behind Global Sustainable Finance is the belief that the capital markets can and should play a critical role in addressing large societal challenges. Our role and comparative advantage is in leveraging our core business skills, global footprint, and capital markets reach in the service of positive social outcomes and partnering with communities to achieve those outcomes.
We lead the firm's engagement as an impact investor via our domestic community development program, which lends to and invests in communities in the United States. We also lead the firm's international microfinance practice, through which we've done over USD 700 million in transactions over the last six years. In addition, we've been focusing on reaching the unbanked and underbanked domestically, helping to capitalize business models providing access to high-quality and appropriately priced products to the underbanked. In addition, we steward the firm's environmental policy and partner across the firm to integrate sustainability as a business opportunity and as a financial consideration. Finally, we think about all these activities holistically as part of our overall sustainability approach, focusing on internal and client practices, to maintain sustainability as a growing part of our core business outlook and philosophy.
- GIIN: How do you think about impact investing specifically at Morgan Stanley? What is "Investing with Impact," and how did this approach evolve?
Impact investing is an area that we've been working on and looking at for a long time, thanks to our involvement with GIIN and the leadership of so many others in the field. We increasingly saw an important opportunity for Morgan Stanley to contribute to the growth of the field. As we thought about our comparative advantages, we identified Morgan Stanley Smith Barney's (MSSB) large scale as key, with 17,000 financial advisors, 4 million clients, and USD 1.7 trillion assets under management. We have an incredibly large network to reach individual investors, and the trusted relationship they have with their advisors is also a very important asset.
We thought about how we could bring elements of impact investing to our broad client base because many different types of investors are demanding to invest for both financial returns and social impact. We believe there are a variety of ways, products, instruments, and asset classes through which investors can invest their core portfolio in line with their personal values, and be able to achieve not only financial return, but also a positive social impact. We decided on a broad approach, which is why we've named our platform "Investing with Impact," recognizing that classically defined impact investments are not always appropriate for all investors.
Please tell us more about the platform.
Our platform has four different categories. The first is around values alignment, for someone trying to minimize any negative impact resulting from their investment dollars. These products screen investments, and we help ensure investments are consistent with the client's values. The second category, as investors try to target positive impact, is environmental, social, and governance (ESG) integration. These offerings include products whose managers target companies with a thoughtful approach to ESG issues so investors help create a company's sustainability. An example in this category would be a mutual fund that includes ESG considerations as both a value differentiator and part of its investment process. The third category is around sector exposure, for investors who have specific areas that they care about, whether they be cleantech, affordable housing, water, or others. Sector exposure includes public equity and debt opportunities, and helps clients pick sectors and industries which may be deemed to have an inherently positive impact). Our fourth bucket is impact investing, which has private equity and private debt vehicles. An example in this category would be a private equity fund focused on emerging market consumers or clean energy. Because of the types of products offered in this category, these opportunities may be restricted to certain types of investors, such as products that are only available to qualified investors with particular profiles around risk, return, and liquidity expectations.
There's confusion about what impact investing means. Many may think impact investing means intentionally taking a haircut on financial return in order to achieve social impact, or only going into deals with very low return expectations. In fact, we're not currently offering concessionary rate impact investing products on the platform. All of the products on this platform must pass muster through core, rigorous, standardized due diligence. We chose this approach because our clients expect clarity around the risk-adjusted rate of return for any product that we offer. This is not to say we never will offer concessionary rate products on the platform, but if we were to, those would be clearly labeled as such.
What are your goals for the platform?
We are hoping to provide more clarity as to what it means to invest with impact, more visibility into the actual investment options, more accessibility to invest in the current offerings, and to help bring thoughtful scale to the field so that over time we can leverage additional capital to products that positively address global challenges.
Another big contribution is getting 17,000 MSSB financial advisors knowledgeable about, comfortable with, and able to advise clients on the range of options for investing with impact. When clients--regardless of their level of wealth, resources, or exposure to impact investing issues--have conversations with their financial advisors, we hope that the advisor is able to have a dialogue about different options. We're hopeful that, over time, this approach enables investors to more easily think about how they can direct their dollars to investments that target both a financial return and social impact.
Why launch this product now?
We have heard increasingly from our clients and financial advisors that there's a real demand for investment opportunities that are generating both financial returns and social impact. Increasingly, both individuals and institutions are more aware of the importance of sustainability. They are also seeing that sustainability is aligned with profit because it often creates lower costs, lower waste, and higher innovation potential. In addition, we're seeing a significant demographic force at work--specifically, the shift in wealth transfer from the baby boomers and the Greatest Generation to Millennials and Gen-Y, who have very different expectations from their investments, including a greater desire for social and environmental transparency and accountability.
- GIIN: What asset classes, impact sectors, and regional markets are covered on the Investing with Impact platform? Where do you see the most opportunity?
We view this platform as a first step, and as a work in progress. Our goal over the next year and beyond is to continually make that product offering richer. The products that we have today are by no means exhaustive. Right now, the values alignment, ESG integration, and sector exposure categories of the platform include publicly traded products like mutual funds and exchange-traded funds, among others. The impact investing category includes private equity and debt. It's a platform with global exposure in a variety of sectors that will eventually provide the broadest possible range of opportunities for our qualifying clients.
- GIIN: Tell us more about the types of clients you think this platform will appeal to.
There's not one particular client profile that we're focused on. We're quite optimistic that this platform will be broadly interesting because we are seeing interest across a spectrum of investors. They include the high-net-worth individuals and family office clients with specific interests, to traditional retail clients, endowments, and foundations with a desire, and in some cases, a mandate or allocation from their Boards, to invest in this area.
- GIIN: How did you make the case for this platform within Morgan Stanley? Tell us about the internal decision process to launch the Investing with Impact platform.
Morgan Stanley has been tremendously supportive and enthusiastic about this launch. Although it took time, we had a robust, iterative process about what type of platform would be the right fit for Morgan Stanley. The great advantage of the MSSB financial advisory is its scale, but that is also what makes it challenging to focus on classic impact investing options, because we need products with the size and track record to pass all conventional hurdles and due diligence. It was important to demonstrate internally that there are a range of products that are accessible, appropriate, and differentiated for our diverse clients, making this platform interesting to at least a subset that care about sustainability and impact as an integrated part of their investment approach.
- GIIN: Has it been difficult to find products that pass your rigorous financial due diligence and also produce social benefit?
It's not as difficult as the perception may be, but it's also not obvious or automatic to identify those products. We feel we're providing clients with real value by identifying these products and presenting them in an organized way that will help clients compare them to other options they may choose within particular asset classes and risk/return profiles. Although identifying appropriate products will not necessarily get easier in the future, our social impact analysis can be more rigorous as impact metrics are developed.
- GIIN: How will Morgan Stanley Smith Barney financial advisors communicate about the social and environmental aspects of the products they find on this platform?
It will be an evolution, and hopefully the categorization on the platform will help. For example, if someone decides on an offering in the values alignment category, there won't be a huge number of social metrics around that, and the conversation will be about what a client wants to screen out. As the GIIN and others continue to develop standards and metrics to help understand social impact, we look forward to having much richer conversations with our clients.
- GIIN: What is needed to build an ecosystem that can help bring impact investment opportunities to a broader set of investors?
We launched the platform at the U.S. State Department's Global Economy Forum last month. This administration has launched a number of initiatives and policies to promote impact investing, which has been a signal to investors about the importance and credibility of public-private partnerships as a way to fuel businesses that ultimately will help solve large societal problems. The government's participation--through the Overseas Private Investment Corporation, the Export-Import Bank, the United States Agency for International Development, and the State Department, among others--is helping to seed the market through a variety of instruments, and is also helping to mitigate risk and perceived risk in impact investing. Although impact investments--because they are sometimes new, different, or outside the mainstream markets--are perceived as high risk, in fact, many may have much lower risk and volatility than traditional investments because well-managed companies often have greater stability in their earnings. In these cases, the government's involvement can help catalyze more private sector capital investment.
- GIIN: What can we expect from Morgan Stanley in the future around impact investing?
The first order of business is to increase the range of offerings on the platform. We believe that investing with impact is a rich, growing, profitable, and sustainable area, and we are looking forward to identifying more products for the platform. We also are hopeful that we can catalyze the creation of new products that will offer additional opportunities for individuals and institutional investors and help bring thoughtful scale to this field.
A note to readers from the GIIN:
Diversity is a hallmark of the impact investment market, which has attracted traditional financial institutions, pension funds, private foundations, government-funded development finance institutions, fund managers, high-net-worth individuals, and family offices. As a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing, the GIIN aims to bring transparency to this market and to the practice of impact investing. To this end, we believe it is in the interest of the field to share a sample of the diverse viewpoints held by investors who are motivated by social and environmental considerations. The publication of such diverse viewpoints, however, should not be construed as an endorsement by the GIIN of those viewpoints or the individuals or institutions expressing them.