Morgan Stanley: How does Sustainability Impact Investing?
Whilst it is clear the world needs to become more sustainable, the innovations and effort needed to achieve this don’t come for free.
Often requiring high upfront costs, sustainability investments can take years to materialize returns, making it difficult to convince key business figures of their strategic importance.
However, views on sustainable investments may be changing.
The Morgan Stanley Institute for Sustainable Investing’s December 2024 “Sustainable Signals” report shows that sustainable funds are expected to increase through 2025 and 2026.
“Institutional investors see a growth trajectory for sustainable assets globally in the coming years to meet increasing client and stakeholder demands in a more mature sustainable investing market,” says Jessica Alsford, Chief Sustainability Officer and Chair of the Institute for Sustainable Investing at Morgan Stanley.
“This year, the Institute has released Sustainable Signals reports with views from individual investors, corporates and institutional investors, with each group seeing sustainability as an opportunity for growth and value creation.”
The challenges and concerns of sustainability investing
The report shows that the top reported challenge in sustainable investing for both asset owners and managers is data availability, followed by fluctuating regulatory guidance and greenwashing.
APAC investors report challenges at higher rates than European and North American counterparts, with particular concerns around the burden of disclosure requirements for investors.
Concerningly, 71% of asset owners report they are worried about possible greenwashing from asset managers.
A similar percentage of asset managers say that asset owners have unrealistic expectations about the sustainability outcomes of their investments.
What are investors interested in?
Morgan Stanley’s report says sustainable investment themes and solutions differ regionally.
Globally, healthcare and financial inclusion are top priorities with circular economy and climate action following close behind.
Global investors across North America, Europe and APAC rank renewable energy, energy efficiency and climate adaptation at the top and climate adaptation solutions are also seen as one of the most underappreciated investment opportunities.
In Europe, protecting wildlife, preventing deforestation and ocean conservation are all top 10 sustainable solutions, but there is no mention of nature or biodiversity in the top 10 for North America or APAC.
North America’s top 10 solutions contained racial diversity, equity and inclusion, but this did not appear in the other regions.
In APAC, top ranked themes include biofuels and support for aging populations.
Investor plans for net zero
Nearly two thirds of asset owners have net zero targets but asset managers are behind on this by eight percentage points.
Almost all of those with a target say they have a plan to deliver on it and about 2% claim to have already reached net zero.
Nearly 40% of asset owners use carbon offsets to mitigate portfolio emissions and 31% of asset managers say they currently offer clients offsets linked to specific products or aggregated emissions.
There is no consensus on the use of carbon offsets among institutional investors, with mixed views on their appropriateness for broad decarbonization efforts or targeted use for specific hard-to-abate emissions.
Matthew Slovik, Managing Director and Head of Global Sustainable Finance at Morgan Stanley, says in a social media post: “Financing is key to accelerating decarbonization.
“Whether it is developing new funding mechanisms or finding ways to build investor support, there is a clear need to think more creatively and ambitiously if we are to achieve climate goals.
“Bold approaches to funding are needed, such as utilizing blended finance, existing federal programs and mobilising concessional capital.”
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