Morgan Stanley IM: Engage Autumn 2022

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We have engaged directly with companies on issues material to the sustainability of returns on operating capital for over 20 years. As active managers running concentrated portfolios and with a long-term investment horizon, we believe we are well positioned to engage with management on financial and material ESG topics and encourage companies towards better practices.

We seek to deliver better outcomes for our clients through producing attractive returns over the long term. To do this, we must invest with a conscious eye on whether companies can deliver not just today, but five, 10, and even 20 years from now. We back companies that have the characteristics needed to lead in the long run, like recurring revenue, pricing power and strong management, and importantly also invest to manage and improve their ESG performance. Direct, portfolio manager-led engagement is, in our view, vital to understanding whether companies and management can deliver across financial and material non-financial areas.

By its nature, quality is less exposed to potential adverse events compared to an average stock in the index. We cannot change or even predict the macroeconomic or political or regulatory environment, but we can aim to ensure that those we hold are the most robust we can find—and that the companies we select have management teams that are more likely to anticipate, mitigate and manage resiliently through adversity. Active portfolio managers that own stocks for the long term rather than just rent them are used to filtering out short-term noise and data for relevant and material drivers of long-term returns.

Meeting with company management matters. That means thorough preparation and a pragmatic use of the chance to meet CEOs, CFOs and Chairs of some of the world’s leading companies, and using these interactions as opportunities to test our hypotheses, gauge integrity and understand management’s strategy, capital allocation and commitment to returns on operating capital, and how they get paid. Beyond the solely financial topics, in the first half of 2022, we continued to engage with company management on a range of ESG subjects, including diversity, equity and inclusion, decarbonisation, biodiversity, executive pay, and supply chain management, amongst others.

Our holistic approach means we typically engage with companies on more than one topic in any given meeting. Environmental topics featured in 65% of our ESG engagements¹, while social and governance topics presented in 38% and 40% of engagements respectively. Download our report to read some notable engagement case studies that took place during the first half of 2022.

¹The International Equity Team defines an engagement as an interaction with senior management or non-executive board member. Engagements may also be those with companies’ investor relations and/or sustainability teams.

^{Risk Considerations
There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy’s assets were invested in a wider variety of companies. In general, equity securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small- and mid-capitalisation companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. ESG strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.}