“Everyone is always so curious about millennials,” says Audrey Choi, chief executive officer of Morgan Stanley’s Institute for Sustainable Investing. “Especially in this space.”
So when her firm surveyed 800 individual investors about sustainable investing in a late-2014 poll, it included a sample of 200 millennials - a cohort of young people now aged about 20 to 34. One of the things that emerged, Choi says, is that millennials really are different from other generations.
They’re almost three times more likely to choose a job because of sustainability considerations. “They want to work in a place they feel is going to have a positive impact on the world,” she says. They’re also twice as likely to make product purchases based on sustainability criteria.
Choi says the study found that about 84 percent of millennials were interested in sustainable investing. “Really significantly, they’re also twice as likely to invest in a stock or a fund if sustainability is part of the value-creation thesis,” Choi, 49, says in an interview at Morgan Stanley’s New York headquarters.
That’s only going to become more prevalent over time, she adds. “If you look at the trends of transfer of wealth to women and millennials, it’s very striking.”
Such trends are part of what led Morgan Stanley in 2013 to start the Institute for Sustainable Investing that Choi leads. Its broad aim is to work with businesses across the firm to help channel investments toward companies that address environmental, social, and governance (ESG) challenges. One of its goals is to get $10-billion (U.S.) of client assets into the firm’s Investing with Impact Portfolio by 2018. As of September, the firm was more than halfway there, with close to $6-billion.
One of the few remaining barriers to the adoption of sustainable strategies is the perception that they’re not profitable, Choi says - an idea that’s increasingly being proved wrong: “There’s more and more recognition that thinking about sustainability is entirely consistent with a fundamental understanding of financial risk and reward.”
Among the evidence Choi points to is a Morgan Stanley study that looked at the performance of 10,228 mutual funds over seven years. It found that 64 percent of the time, sustainable strategies matched or outperformed traditional funds in terms of returns, she says. What’s more, the sustainable strategies had equal or lower volatility most of the time.
The relative performance of sustainable strategies is important, but Choi says there’s another takeaway that’s just as key. If you plot the returns of the traditional strategies, you get a normal distribution - some performed very well, some poorly, and most were in the middle. The result when you plotted the sustainable strategies? The same. “You also got a pretty normal bell curve,” she says.
For investors, that means you have to apply the same critical eye to sustainable investing as you would to any deployment of capital. “You as an investor want to have the data, intelligence, insight, or advice as to which managers you would pick,” says Choi, who also heads the firm’s global sustainable finance group.
When it comes to data and measurement of ESG metrics, the investment industry is currently in a “creative abundance phase,” Choi says. “Every month - if not more frequently - there’s a new study, or a new index, or a new benchmark, or new data.”
So what are the key performance indicators that affect companies’ financial results? Not every metric is relevant to every industry. “Animal testing may not be relevant for a software company or financial-services company, but it’s very relevant to a consumer-products company,” Choi says.
One group addressing such issues is the Sustainable Accounting Standards Board. Choi, who’s a member of the board of the San Francisco-based nonprofit standards-setting organization, says its goal is to raise the level of disclosure on sustainability criteria that are useful in making investment decisions. To that end, SASB is developing sustainability accounting standards for 79 industries in 11 sectors.
“It’s saying that things like water use, waste management, employee practices, and governance can actually have a material effect on financials,” Choi says. “They ought to be part of the standard set of things that companies disclose.” (Michael R. Bloomberg, founder and majority owner of Bloomberg LP, is the chairman of SASB.)
SASB’s efforts intersect with those of other groups and Choi’s firm, she says. “What we’re doing at Morgan Stanley is saying, ‘How do those factors feed into investment judgment?’ ” she says. “We are really working on integrating sustainability into our core valuation of things.”
In 2015, Morgan Stanley published a framework for incorporating ESG factors, such as water use by miners, into a stock’s valuation. The guide, which covers 30 sectors, was updated in March.
Demographic trends will only make questions about how resources are used more important over time. Choi points to estimates that the world’s population will increase to 9.7 billion by 2050 from 7.3 billion now. That underscores the need for efficiency in food, water, and energy use.
Smart long-term investors - whether they’re millennials or not - can take advantage of these trends, she says: “There are huge opportunities to invest in companies that are going to be the leaders in creating more sustainable agriculture, or water conservation, or more energy-efficient solutions.”