Increasingly, investors are defining long-term value as not only realizing attractive returns, but also generating a positive social or environmental impact. To that end, they are looking for ways to put their investment dollars to work, using their wealth as a force for change.
Impact Investing: Aligning Your Portfolio with Purpose
Investing with impact continues to grow in popularity as investors seek to align their portfolios with their values.
What It Means to Invest with Impact
Impact investing refers to investments made into companies, organizations and funds with the intent of generating a measurable and beneficial social or environmental impact alongside a market-rate financial return. In other words, investing with impact seeks to align financial goals that are driven by economic fundamentals with impact goals that are driven by your personal values and mission.
Today, investors are interested in sustainable investing. And the shift toward investing in funds that focus on environmental, social and governance (ESG) factors is gaining momentum. Consider that more than half of individual investors say they plan to increase their allocations to sustainable investments in the next year and over 70% believe strong ESG practices can lead to greater returns.1
Debunking Myths about Investing with Impact
There are several myths surrounding impact investing:
Myth No. 1: Investing with impact means sacrificing returns.
Applying an impact lens to your wealth management decisions does not mean choosing personal values over financial performance. In fact, according to the Morgan Stanley Institute for Sustainable Investing, sustainable funds have often weathered recent periods of volatility better than non-ESG portfolios and in 2023 outperformed their traditional peers across all major asset classes and regions.2 “2023 saw sustainable funds return to their long-term trend of outperforming their traditional peers,” says Jessica Alsford, Morgan Stanley’s Chief Sustainability Officer and CEO of the Institute for Sustainable Investing. Keep in mind, though, past performance is no indication of future results.
Myth No. 2: Investing with impact is a niche area.
The truth is, sustainably invested assets accounted for $3.4 tn AUM in 20232 and in the 2024 “Sustainable Signals” report, 77% of individual investors said they are interested in investing in companies or funds that consider positive social and/or environmental impact while aiming to achieve market-rate financial returns.3
Myth No. 3: Impact investing products are limited.
In reality, assets under management incorporating ESG criteria globally are expected to increase to US$33.9tn by 2026, and ESG assets are projected to make up 21.5% of total global AUM in less than 5 years.4
Getting Started
Every investor has a unique set of financial goals and priorities, and there is no one-size-fits-all approach to investing with impact. There is a full spectrum of approaches to transitioning to investing with impact, including:
- Restriction screening, which manages exposures by intentionally screening out investments based on an investor’s preferences.
- ESG integration, which proactively considers ESG criteria alongside financial analysis during the investment selection process.
- Thematic exposure, which focuses on themes and sectors dedicated to solving sustainability-related challenges, both in the U.S. and abroad.
The Bottom Line
Whether you want to allocate all or part of your portfolio to investing with impact, working with a Financial Advisor who has experience with impact investing can help you align your financial goals with your personal values.
Footnotes:
1 Morgan Stanley Institute for Sustainable Investing, Sustainable Investment Interest on the Rise in 2024 | Morgan Stanley
2 Morgan Stanley Institute for Sustainable Investing Sustainable Funds Outperform: Year-End 2023 | Morgan Stanley
3 Morgan Stanley Institute for Sustainable Investing “Sustainable Signals: Understanding Individual Investors’ Interest and Priorities
Disclosures:
This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Certain portfolios may include investment holdings deemed Environmental, Social and Governance (“ESG”) investments. For reference, environmental ("E") factors can include, but are not limited to, climate change, pollution, waste, and how an issuer protects and/or conserves natural resources. Social ("S") factors can include, but not are not limited to, how an issuer manages its relationships with individuals, such as its employees, shareholders, and customers as well as its community. Governance ("G") factors can include, but are not limited. to, how an issuer operates, such as its leadership composition, pay and incentive structures, internal controls, and the rights of equity and debt holders. You should carefully review an investment product's prospectus or other offering documents, disclosures and/or marketing material to learn more about how it incorporates ESG factors. into its investment strategy.
ESG investments may also be referred to as sustainable investments, impact aware investments, socially responsible investments or diversity, equity, and inclusion (“DEI”) investments. It is important to understand there are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. This is due to a current lack of consistent global reporting and auditing standards as well as differences in definitions, methodologies, processes, data sources and subjectivity among ESG rating providers when determining a rating. Certain issuers of investments including, but not limited to, separately managed accounts (SMAs), mutual funds and exchange traded-funds (ETFs) may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. Further, socially responsible norms vary by region, and an issuer’s ESG practices or Morgan Stanley’s assessment of an issuer’s ESG practices can change over time.
Portfolios that include investment holdings deemed ESG investments or that employ ESG screening criteria as part of an overall strategy may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results. For risks related to a specific fund, please refer to the fund's prospectus or summary prospectus.
Investment managers can have different approaches to ESG and can offer strategies that differ from the strategies offered by other investment managers with respect to the same theme or topic. Additionally, when evaluating investments, an investment manager is dependent upon information and data that may be incomplete, inaccurate or unavailable, which could cause the manager to incorrectly assess an investment’s ESG characteristics or performance. Such data or information may be obtained through voluntary or third-party reporting. Morgan Stanley does not verify that such information and data is accurate and makes no representation or warranty as to its accuracy, timeliness, or completeness when evaluating an issuer. This can cause Morgan Stanley to incorrectly assess an issuer’s business practices with respect to its ESG practices. As a result, it is difficult to compare ESG investment products.
Morgan Stanley’s assessment of an issuer’s ESG practices or an ESG portfolio is as of the date of this material. No assurance is provided that the underlying assets have maintained or will maintain any applicable ESG designations or any stated ESG compliance, or that the underlying assets have been operated or will be operated in an ESG-compliant manner. The ESG impacts of the securities and any underlying assets may vary over time. This can cause Morgan Stanley to incorrectly assess an issuer’s business practices with respect to its ESG practices. As a result, it is difficult to compare ESG investment products.
Morgan Stanley makes no representation as to the compliance or otherwise of any fund or portfolio with any laws or regulatory guidelines, recommendations, requirements or similar relating to the ESG characterization of any fund or portfolio, or in connection with or to meet any of your investing ESG objectives, metrics or criteria. The appropriateness of a particular ESG investment or strategy will depend on an investor’s individual circumstances and objectives. Principal value and return of an investment will fluctuate with changes in market conditions.
Diversification does not guarantee a profit or protect against loss in a declining financial market. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Morgan Stanley at Work services are provided by Morgan Stanley Smith Barney LLC, member SIPC, and its affiliates, all wholly owned subsidiaries of Morgan Stanley.
© 2024 Morgan Stanley Smith Barney LLC. Member SIPC.
CRC# 3657141 (06/2024)
