Morgan Stanley IM: Navigating Evolving Opportunities in Sustainable Investing

Morgan Stanley IM: Navigating Evolving Opportunities in Sustainable Investing

This Q&A comprises edited highlights of the above-named session with panelists Navindu Katugampola, Global Head of Sustainability for Morgan Stanley Investment Management (MSIM) and the Global Head of Sustainable Investing for MSIM Fixed Income and Liquidity teams, and John Streur, President & CEO of Calvert Research and Management.

28.10.2021 | 07:10 Uhr

The panel was moderated by Emily Chew, Executive Vice President and Chief Responsible Investment Officer of Calvert Research and Management.

Here you can find the complete article.

Emily Chew (moderator): Has the COVID experience influenced the way you think about sustainable and responsible investing?

Navindu Katugampola: The pandemic has certainly shone a light on the effects of social inequality and, for us, attention to social factors during this period has really grown to be an even more integral part of how we invest. At the corporate level, Morgan Stanley last year added a fifth value to our core values – a commitment to diversity and inclusion – and this is something that we've also focused on at Morgan Stanley Investment Management (MSIM). Social themes are not just important to us from a moral perspective. We believe that they're integral to the success of companies, and even countries.

John Streur: Just picking up on Navindu’s point about social inequality, at Calvert Research and Management we have done research into inequality that reveals, not surprisingly, a lack of access to opportunity as the critical driver creating some of the inequalities that we're dealing with globally. To convert such research into investor-useful information, we have developed a process that is based on the business case for addressing diversity, equity and inclusion. We focus on the business case because we know that a company can undertake to do something that might be for the greater good, but if that effort is unable to produce adequate financial results for the company, those efforts usually collapse on their own weight and don't scale.

Emily: With the rise of social-labeled bonds, do you think their credibility is as robust as the environmentally labeled bonds or so-called “green bonds” at this time? Given the rush of issuance, I worry that standards may have fallen a bit.

Navindu: The simple fact is that on the environmental side – on the green side – the data is a little bit more objective. You can look at things like carbon emissions, which is comparable. It's objective. Essentially, the data translates across different geographies and sectors.

On the social side, it is much more nuanced. What is a definition of a vulnerable population? What is a social issue? And that's when it becomes a little bit more challenging to really identify the most impactful issuers and project sets. And I would say there, the methodology we've developed to try and look through that “social washing”, if you like, is to try to look at change and additionality. In what way is the issuance of this instrument and the projects being supported helping to bring about meaningful, real social change? That is sort of the litmus test, if you like, for social bonds. But I certainly agree with you that it's much more challenging, especially given the acceleration of issuance we've seen in the market.

Emily: John, given the growth in the supply of instruments, as well as the growth in demand that we're seeing across all segments of the market, do you think that the challenge of “greenwashing” or “social washing” could be a phenomenon with the potential to undermine the credibility of the sustainability and responsible investing space?

John: Yes, I do there’s a risk of this happening. For this reason, I think it is critical that we all look at issuance and issuers – whether fixed income or equity – in a fact-based, scientific manner. We have to develop the market infrastructure in order to create the flow of information needed by investors to be able to have confidence in the information that we're working with – particularly as we make these enormously important improvements to our capital market systems globally to get capital to the right place to address immediate and long-term sustainability. Developing this infrastructure entails hard, company-to-company, issuer-to-issuer, skeptical research – research that is scalable and accessible to all market participants.

Emily: Navindu, what are your biggest challenges and opportunities in implementing sustainable investing strategies?

Navindu: The huge challenge is with sustainability data – its availability, its transparency, its comparability, how timely it is, and, actually, the degree to which you can derive useful insight from it. So, that's the challenge. But the opportunity is to develop more incisive ways of bridging that data gap, which, in turn, potentially allows you to make better investment decisions and ultimately achieve better sustainability outcomes.

Emily: John, could you provide some examples of how Calvert has increased the amount of information and disclosure available to the marketplace through engagement?

John: Sure. Calvert is very active, and sometimes fairly aggressive, in terms of how we engage with issuers. I’ll give just one example of the success we’ve been seeing.

In the U.S., corporations are not required to disclose the demographics of their workplaces. So, we've launched a major campaign to work with the 100 largest companies in the United States to get them to disclose the information about the gender and racial makeup of their companies at every level. And in some cases, we have filed shareholder resolutions and taken it to a vote, getting into a proxy fight with management.

It's been a successful effort. We have gone from having about 18 companies that provided this information to now nearly 75. It is also an example of how Calvert works as a catalyst to create a movement because we now have many, many other asset owners and investment managers moving in this direction, urging corporations to disclose the information.

Emily: To wrap up, what are your thoughts on the one, key thematic investment trend to watch as we head toward 2022?

Navindu: With COP26 in Glasgow in a couple of months, and also the increasing focus on greening the recovery, I expect the theme of net-zero carbon emissions will be key going into 2022, and that's both in the context of demands for companies to commit to it and implement it, but also for us, as asset managers, to provide investment solutions to help our clients achieve net zero in their portfolios.

John: I'm going to stay with Navindu's theme about carbon emissions and I’m going to put a little spin on it. I think we're going to see a theme of going from promises to implementation; from statements to action. And this will be an opportunity of significant importance for investors because this is not going to happen uniformly. There are going to be a small number of companies that have what it takes to effectively transition into a lower-carbon environment, and there are going to be a much larger set of companies that are really going to struggle with this and impair their opportunity sets at the company level.

A significant investment opportunity exists for those investors who can differentiate between companies that just make big statements versus those management teams and the boards that have the discipline and expertise to say what they do and do what they say. The latter group of companies, I think, will be in the minority.



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 values 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 Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. 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.

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