Despite the growth in recent years of sustainable investments, many financial advisors have been slow to embrace the philosophy because of their belief that returns suffer and because it’s often a challenge for them to meet the needs of very different clients.
Financial institutions have taken note of the gap between client interest and action in the space. Morgan Stanley, for example, has been working to make sustainable investing as accessible and effective as possible by removing the barriers that keep advisors on the sidelines through education and easy access to products.
The firm’s “investing with impact” platform, first launched a couple of years ago, provides Morgan Stanley Wealth Management’s advisors with more than 130 products—both mutual funds and ETFs—across asset classes. To simplify the investment process even more, the platform now includes themed options, or “tool kits,” allowing advisors to develop tailored investment approaches for clients. The first, the Catholic Values Tool Kit, launched in the fall of 2015 and was followed earlier this year by a tool kit for those concerned about climate change and fossil fuels. Additional products will be rolled out over the coming months and years.
The firm also now provides multi-asset-class model portfolios its advisors can use to integrate sustainability across a client’s investments, says Audrey Choi, head of Morgan Stanley’s Institute for Sustainable Investing. “So instead of saying, ‘I’ve got my traditional portfolio over here and I’m going to dip one tiny toe in sustainable investing and choose one product,’ and that one product may or may not perform because of the manager, or because of the markets, they can align a portion or all of their portfolio to a diversified asset allocation that supports social and environmental benefits without compromising financial performance potential,” she says.
Educating advisors starts with addressing what Choi calls the misconception, held by advisors and investors alike, about returns. In a survey of individual investors, released early last year, Morgan Stanley found that while 71% were interested in sustainable investing, 54% believed choosing between sustainability and financial gains was a trade-off. So the firm set out to find a definitive answer to the question, reviewing a range of studies on sustainable investment performance and examining seven years’ worth of performance data for more than 10,000 open-end mutual funds and nearly 3,000 separately managed accounts (SMAs) based in the U.S.
The results showed that when compared with their traditional counterparts, sustainable equity mutual funds had equal or higher median returns and equal or lower median volatility for 64% of the periods examined. Sustainable SMAs had equal or higher median returns for 36% of the periods examined and equal or lower median volatility for 72% of the periods examined. And on a risk-adjusted basis, sustainable SMAs performed closely in line with their traditional counterparts.
Additionally, one of the studies Morgan Stanley reviewed—done in 2011 at Harvard University—found that if you invested $1 in 1993, the dollar invested in a value-weighted portfolio of high-sustainability companies would have grown to $22.60 by 2010, while a dollar invested in a low-sustainability portfolio would have reached only $15.40, a difference of more than 46%.
The performance of the mutual funds is particularly notable because one of Morgan Stanley’s objectives with the impact platform has been to somewhat democratize sustainable investing, to make it accessible to a broad range of clients beyond the high-net-worth demographic that’s become synonymous with impact investing.
It’s not impact investing for the masses, but you don’t have to be a one-percenter, either.