Sustainable investing becomes more than a reputation game

Sustainable investing has long been a bit of PR window-dressing for banks trying to disguise their other, less palatable investments. Or at least that’s how many outside the financial services industry perceive such noble proclamations by banks. However, while many investors have looked at sustainable investment products as a niche part of their portfolio that carry some form of financial trade-off, recent trends suggest these types of investments are actually proving to be both environmentally beneficial and financially fruitful.

The market is said to have grown over the last three years by as much as 61 percent. According to a report by the Global Sustainable Investment Alliance, that increase represents total assets under management at the end of 2014 of $21.4trn, substantially higher than the $13.3trn of 2012.

Green fields
One company that was pioneering the sustainable investment market long before it became popular among major financial institutions was leading US bank Morgan Stanley. Since it launched its sustainable investment operation in 2006, Morgan Stanley has helped to generate more than $61bn of capital for projects in the renewable energy sectors and other clean technologies. In 2012, the company launched its Investing with Impact strategy, which acted as a framework for its investment decisions to have a positive impact on the world.

In 2014, the bank launched its Institute for Sustainable Investing, which brings together its strategies for the sustainable investment space. Morgan Stanley’s Institute for Sustainable Investing CEO Audrey Choi says this was designed to speed up adoption of sustainable investments across the industry.

She adds: “There’s been a broad commitment that Morgan Stanley has made to sustainable investing. We’ve actually really been looking at the sustainable investing space for a number of years now, because we fundamentally believe that [it] is about good investing, and looking more broadly and comprehensively at environmental, social and governance factors that could either present a risk or return opportunity for companies.”

The bank has now unveiled a product it feels will give a major shot in the arm to the sustainable investing business: green bonds. Morgan Stanley believes the $500m green bonds whose issuance it announced in June represent a significant step for the market.

Choi says: “With green bonds specifically, we’ve seen a real growth in the market and also a real diversification in who the investors are. There are certainly investors who are very active in the green bonds space, who are specifically green or social responsible investors who have a history of managing those types of funds or portfolios. But we’ve also seen a very significant increase in mainstream institutional investors. The biggest institutional and asset manager names that you would think of are increasingly looking at green bonds.”

New generation
It appears younger generations are showing more interest in sustainable investing than those before them. According to a study by Morgan Stanley, 84 percent of individual millennial investors are open to sustainable investing, compared to 79 percent of Generation X investors and 66 percent of Baby Boomer investors.

Helping to combat the environmental challenges the world is facing is certainly a noble cause, but not one typically associated with major banking institutions. In the past, renewable energy and clean technology have been the focus of more niche players and passionate individual investors. However, with declining oil prices and a renewable energy market finally offering cost-efficient solutions, major investors are starting to take it seriously.

Morgan Stanley has helped develop a number of renewable energy projects, such as the 150MW Route 66 Wind Farm in Texas. It is an area Choi says has a lot of potential: “We really think that sustainable investing, with clean energy being one important component, is a clear and growing trend in terms of demand. We believe that, if you’re going to make a quality, sustainable investment, it has to make sense as an investment. We feel these types of projects do make sense as investments and that they have the additional, very significant, benefit of contributing to a clean energy economy.”

Answering sceptics
While investing in sustainable products has its benefits to the environment and society, Choi maintains it has to make financial sense for the investor: “When we talk about sustainable investing, we define that as investing that first and foremost obeys all the principles and best practices of investing, full stop.”

However, the sector has come in for criticism in the past from people who suggest it is merely a bit of green window-dressing for major financial institutions engaging in more unscrupulous transactions. Choi acknowledges that perception among the community is something that needs changing – not least the idea that sustainable investments have a financial trade-off.

The bank recently conducted a poll of individual investors to better understand how they perceived the industry: whether it was a passing phase or a growing trend. According to the study, 71 percent of investors were interested in the market, while 65 percent said they thought it was a real trend that was set to become more important within the next five years. However, 54 percent of investors had concerns there might be a financial trade-off with sustainable investing.

Taking the results, Choi’s team decided to look at whether those concerns were well founded, and discovered that in many cases they were not. “We looked at a class of funds that is widely available to average investors and took a data set of 10,000 mutual funds and seven years worth of performance. We compared the performance of the sustainable funds versus the traditional funds, and, when you actually run the numbers, you see that, more often than not, the sustainable investing funds performed the same or slightly better from a return perspective. What was really interesting was, more often than not, they performed similarly or slightly lower in terms of volatility. We found that they’re either the same or better on both risk and return.”

While the news was encouraging, Choi stresses manager selection for funds was still a vital aspect of the market: “Just because you have the word ‘sustainable’ in the product, it doesn’t mean that all the laws of investing are suspended!”

In the coming years, there is likely to be a growing emphasis on sustainable investing across the portfolios of major institutions. Indeed, Bank of America recently announced its own $600m green bond issuance. Choi says she welcomes other institutions taking sustainable investing seriously, and hopes Morgan Stanley’s work will act as a catalyst for the market. “We are certainly committed to accelerating the adoption of sustainable investing by the mainstream because we believe it is sound investing that will pay dividends to both investors and the overall economy and ecosystem. We’re very excited to see many different players across the ecosystem of sustainable investing bring more products and opportunities.”