The Means of Investing Sustainably Continue to Grow

This analyst blog is part of our coverage of the 2016 Morningstar Investment Conference.

By Sylvester Flood

Asked by moderator Jon Hale whether sustainability is still a niche interest, Lisa Woll, CEO of U.S. SIF: The Forum for Sustain and Responsible Investment, said advisors know that if they cannot converse with clients about sustainability with investors who are interested in it, those clients will go elsewhere. In response, SIF has introduced a course for investment professionals to understand sustainability that had been relatively well received.

Hilary Irby, who heads Morgan Stanley’s Global Sustainable Finance group, pointed to the wide and deep platform the firm has developed for investors that now carries 130 products, from funds to separate accounts to ETFs.

Clearly, the two panelists agreed that sustainability is reaching the mainstream.

But what of trade-offs? Can a market return (or better) be achieved when investing with sustainability in mind?

Irby cited a recent Morgan Stanley study that looked at intentional ESG funds over a seven-year period. They found that such funds had earned returns slightly better than the market, but, interestingly, with volatility under the market average.

During the Q&A session, an advisor who has worked with many clients who wanted to invest sustainably asked the panel how an advisor who excludes certain investments can explain the opportunity cost of such choices to clients. For example, one of the advisor’s clients had missed out on the commodities and basic materials boom of the past decade because the client desired to exclude carbon from his portfolio.

Both Woll and Irby said advisors must gauge the investor’s level of conviction and design the portfolio accordingly. Irby characterized the categories as clients who want to walk, run, or jog when it comes to sustainability. Such client-level requirements go a long way in explaining why Morgan Stanley’s sustainability platform has taken the shape it has.

Asked what sustainable investing field would look like in 2026, Woll worries that the "rhetoric would outpace the reality," again pointing to the paramount role that advisor training will play in ensuring that client success will be meaningful. For her part, Irby asserted that sustainability will become a fundamental part of investing in 10 years.

Woll sees the new Morningstar Sustainability Rating as a great opportunity to build broad interest in sustainable investing, but as just a start.

The diversity of views that investors may want realize in portfolios suggests an intermediate future in which advisors continue to play a central role in understanding clients' sustainability needs and objectives, setting expectations, and monitoring success.