Big Investors and the Young Nudge Morgan Stanley Toward Sustainable Investing

Source: Pacific Community Ventures

Audrey Choi, head of global sustainable finance for Morgan Stanley Group Inc., at the 2012 Impact at Scale launch in New York. Close

Audrey Choi, head of global sustainable finance for Morgan Stanley Group Inc., at the... Read More

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Source: Pacific Community Ventures

Audrey Choi, head of global sustainable finance for Morgan Stanley Group Inc., at the 2012 Impact at Scale launch in New York.

ImpactIQ.org — Some of the biggest names in institutional finance are starting to bank on sustainability.

Morgan Stanley this month announced a five-year goal of $10 billion in client assets for its “investing with impact” program, 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 said that it is raising a $250 million "social impact fund" to invest in affordable housing, health clinics and schools for disadvantaged communities.

These initiatives come after a September report from the World Economic Forum cautiously concluded that impact investing is ready to break out from its niche of philanthropically minded funders and capture the imagination — and the assets — of mainstream institutional investors. “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.

Q: What have you learned since you launched the Investing with Impact platform 18 months ago?
A: 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.

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.

Q: Do you believe those kinds of solutions can deliver alpha returns? Or is your position that there are tradeoffs between impact and financial returns?
A: 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.

Impact IQ provides original reporting and analysis for investors and entrepreneurs pursing social, environmental and financial returns. Transcript edited for length.

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