NO ONE CAN ACCUSE MORGAN STANLEY OF MERELY flirting with sustainable investment products. The April launch of Morgan Stanley Smith Barney’s Investing with Impact Platform and a similarly named firmwide initiative make it one of a handful of banks to institutionalize socially responsible investing. “Most of the products of this type that we offered previously had come either through client interest in our having those products or from an asset manager partner who had a really compelling product,” recalls Hilary Irby, the brokerage firm’s New York–based head of the Investing with Impact initiative. “We hadn’t systematically gone through and said, ‘If one were trying to invest this way across the portfolio, how would you do it?’ ”
No wonder Morgan Stanley is so keen on this growing domain: A 2010 study by the Washington-based Social Investment Forum Foundation found that in the U.S., one of every eight dollars under professional management, or $3.07 trillion, was subject to “environmental or social criteria, policies or screens.” There’s also reason to be optimistic about impact investing, an SRI subset whose proponents sometimes put social good before profit. Although it based its projections on just 1,100 existing deals, a 2010 J.P. Morgan report on impact investing estimated that over the next decade strategies providing five services ranging from housing to primary education could attract between $400 billion and $1 trillion and turn a profit of $183 billion to $667 billion. That would be extraordinary growth for a sector that currently has $50 billion in assets worldwide, according to the Global Impact Investing Network.
The new platform at Morgan Stanley Smith Barney, whose 4 million clients hold some $1.7 trillion in investable assets, takes a run at organizing the firm’s SRI offerings. It divides the space into four categories (in order of increasing impact): screening out investments in objectionable companies and debt; environmental, social and governance integration, or paying attention to ESG factors when choosing debt and equity investments; investment products focusing on green or socially friendly themes and sectors; and impact investing, which consists of private equity and private debt investments in social enterprises bent on making positive change.
The platform contains 70 products, ranging from mutual funds screening for tobacco and firearms to a private equity fund focused on project-level renewable-energy investments. As part of the broader Investing with Impact initiative, Irby and her global sustainable finance group are working with other Morgan Stanley business units to develop new products.
Likewise, UBS is being systematic about SRI. Erika Karp, the Swiss bank’s head of global sector research, pushes analysts to integrate sustainability factors into their company and sector coverage. “Just like putting a global lens on any domestic issue or stock, it’s critical to wear a broader lens of sustainability,” explains Karp, who is based in New York.
In 2011, Karp began requiring all analysts to include a section on “sustainable innovation” in their annual sector outlook reports. And for the past three years, UBS has given its European analysts an ESG analyzer — a “road map,” as Karp calls it — that they must use to identify key ESG questions and issues. In the energy sector, for example, analysts look for risks and opportunities related to companies’ reputations and energy efficiency. With analyzers currently being rolled out for other regions, Karp expects to have a global version next year.
In January, Royal Bank of Canada became the country’s first major bank to launch an impact investing fund. RBC seeded the fund with $10 million of capital; next year the board will consider opening it to outside investors. Sandra Odendahl, Toronto-based director of corporate sustainability at RBC, which manages more than $250 billion in assets, describes it as a pilot project. “The fact that we’re doing this is making people say, ‘Oh, this is something we should be looking at,’ ” Odendahl says. “This shows that even a big organization can be innovative and try new things.” • •
