Watch this space: Major financial institutions are starting to compete for clients who want to mobilize their capital for social and environmental solutions.
(Updated with new comments from Morgan Stanley CEO James Gorman below.)
Morgan Stanley this month announced a five-year goal of $10 billion in client assets for its Investing with Impact platform, which offers investors a range of products targeting social responsibility and environmental sustainability. The company also said it would put $1 billion of its own money toward a “sustainable communities” initiative to preserve affordable housing that is at risk of becoming either too run-down or too expensive.
A few days later, Goldman Sachs announced it is raising a $250 million “social impact fund” to invest in affordable housing, health clinics, schools and job creation for disadvantaged communities, as well as in “social impact bonds,” a novel mechanism for financing preventive services around homelessness, prisons and health care.
All that comes after a September report from the World Economic Forum that cautiously concluded that impact investing is ready to break out from its niche and capture the imagination — and the assets — of mainstream institutional investors, in part because the focus serves to drive higher investor commitments. “Mainstream investors agree that impact investing has the potential to drive a distinct competitive advantage,” the report said.
For insight into why sustainable investing is now entering the major leagues, Impact IQ caught up recently with Audrey Choi, head of Morgan Stanley’s global sustainable finance group. Choi is also CEO of the bank’s newly formed Institute for Sustainable Investing, which will develop new investment products and provide support to the emerging field.
Impact IQ: What you have learned since you launched the Investing with Impact platform 18 months ago?
Audrey Choi: At the broadest level, we believe capital markets have a very important role to play in addressing some of the biggest challenges out there as we rocket towards a planet of nine billion people. The velocity and acceleration with which these challenges are intensifying is dramatic. We really believe that large-scale private capital has to be part of any solution.
We further believe that you only get large-scale private capital driving towards solutions if it is financially sensible and rational for investors to be there. We have a unique opportunity to help mobilize rational, private sector capital towards some of these large global solutions – whether it’s resource scarcity, education, health care, or housing. We believe there are some incredible opportunities and incredible needs.
Q: Are clients asking for impact products?
A: We have definitely seen a steady growth in client demand, both individual and institutional. We launched the Investing with Impact platform because we had been seeing several trends.
One was the generational trend. You are definitely seeing a next-gen effect of younger investors who want to change the ways that their families or institutions invest.
We also see an institutional trend. The European institutions have been further along on this, but we have worked with a number of institutional investors — pensions or endowments – who are seeing, either from their boards or memberships, an increased desire to know what’s in their portfolio to make sure that it is consistent with their values.
We have clients who have said that they are only going to give incremental assets to managers who understand this – or they might want to move some of their assets to places that are really passionate about this.
We see this as something we are driving out of our core business…If you want to be a leading player in financial services, then you have to have a very robust way of thinking about these issues and helping clients address them.
Q: You have a goal of growing the platform to $10 billion in client assets over five years. What does that represent? Where are you at now?
A: Today we have about $2 billion of client assets that are in the products on our Investing with Impact Platform….And, yes, we want to grow that to $10 billion over the next five years in those kinds of products and strategies.
The Investing with Impact Platform is predominantly focused on individual, retail clients. Having said that, one of the commitments our CEO James Gorman mentioned was that some really outstanding talent in our Investment Management business’s Alternative Investment Partners and Long-Only divisions are going to be actively working on building additional products that are focused on financial return and impact. We want to make sure that there is a robust set of options for institutional quality products that achieve both financial and social returns.
Q: What are you thinking of in terms of new products?
We have four different buckets on our platform, so investors have choices. One product category is around values alignment. That may be for the clients who want to make sure that there is nothing objectionable in their portfolios. You can make individual decisions – for instance, that you don’t want to have firearms or tobacco in the portfolio. Additionally, we have a bucket around Environmental, Social and Governance integration. This is for clients who are looking at ESG analysis as the core part of how they identify that long-term value. And (the platform) contains products that allow you to say, for instance, “I really have a belief that clean energy, or affordable housing, is the way to go.”
And, we have a fourth category called Impact Investing and that’s where we have the private equity and private debt options. Consistent with the discussion about mainstreaming impact investing or “impact investing 2.0,” one of the needs that we want to address is developing private equity impact investing solutions that are of institutional quality. That means scale, track record, and financial performance – and having our best portfolio managers working on strategies that fit that bill.
We believe that impact investing has the opportunity to encompass a very, very broad set of assets and approaches and strategies. And, within the private equity space we want to drive products of institutional quality and scale so you can really start moving assets there at scale.
Q: Do you believe those kinds of solutions can deliver alpha returns? Or are you an impact-versus-financial-returns tradeoff person?
We definitely believe that a lot of these big challenges provide very large growth opportunities – especially when you look at the demand curves for quality affordable housing, education, health care, clean water, food, et cetera.
Again, looking at the demand curves: There are four billion people on the planet who live on less than eight dollars a day. They constitute something like a $5 trillion market. Those consumers are not served very efficiently. They often pay higher unit prices for a lot of amenities because they don’t have the ability to buy in bulk. They can’t store goods. They are overpaying for some of these basic goods and services. In that inefficiency there is actually a huge business opportunity to improve the quality of a product or service that you are providing and still have a very healthy margin.
If you can crack the code on how to do that, you can see some tremendous growth patterns. We have seen some inspired companies that have devised different business models looking at different distribution mechanisms, different price points, different serving sizes, and different financing plans, to be able to drive down prices, increase quality and have a very healthy, growing business.
Q. How does the Sustainable Communities investment fit in?
A: That $1 billion commitment is going to be working on integrated community solutions where we will, for example, invest in quality affordable housing and then go several steps beyond. For example, we recently launched something called the Healthy Futures Fund where we are very deliberately driving affordable housing dollars to developments where the housing is co-located with affordable health care, so families have ready, easy, convenient access to affordable health care.
That increases their likelihood of going to preventive care, which is so important to avoiding medical crises. This, in turn, is really important to the economic stability of the family and that, over the long term, also happens to be good for investors. When the tenants are healthy, able to keep their jobs, able to pay their rent, and happy to be in their community, that will lead you to higher occupancy, lower turnover and all around better quality of your asset management.
(A version of this article first appeared on Bloomberg.com under the headline, “Big Investors and the Young Nudge Morgan Stanley Toward Sustainable Investing.”
Photo: Audrey Choi, head of global sustainable finance for Morgan Stanley Group Inc., at the 2012 Impact at Scale launch in New York. Courtsey of Pacific Community Ventures.)