Many sustainable investment funds are “too light on ESG criteria”, says Morgan Stanley Investment Management

ESG Money Pots

Morgan Stanley Investment Management is bidding to address a lack of bond funds on the market that deliver on both ESG and returns, with the launch of two new sustainable fixed income funds.

Navindu Katugampola, head of Sustainable Investing for Fixed income and Liquidity at Morgan Stanley Investment Management, says the launches of the MS INVF Sustainable European Corporate Fund and the MS INVF Sustainable European Strategic Fund were motivated by a perceived gap in the market. 

“Many other options in the market are either excessively concentrated in terms of sector exposure, potentially affecting returns, or else are too light on ESG criteria (eg only restriction screens) and lack a comprehensive Sustainability approach.”

The fund industry is under scrutiny to deliver on sustainability promises, as last year eight out of 10 of the biggest ‘sustainable' funds in the US were revealed to be holding investments in oil companies. 

Managers reasoned that investing in fossil fuels gave their funds diversified exposure to many sectors, allowing investors to experience the same level of risk and return they were accustomed to with general market indices.

Katugampola adds: “More clients are seeking to incorporate Sustainability objectives into their investments, without wishing to compromise on diversification and returns.

“We believe incorporating sustainability into our investment process and actively engaging with issuers makes us better investors – enabling us to identify and reduce ESG risks and capture ESG opportunities. At the same time, we believe that it is possible to specify Sustainability objectives for a portfolio without compromising alpha targets or sector diversification, which are the goals of our new funds.”

The MS INVF Sustainable European Corporate Fund and the MS INVF Sustainable European Strategic Fund will focus on the top 80 per cent of corporates/sovereigns based on Morgan Stanley’s proprietary ESG scoring, and have a target of at least 10 per cent allocation to Green and other Sustainable Bonds, all of which are assessed by the firm’s Sustainable Investing team.

“We have already seen an impressive rise in Social Bonds issuance in H1 2020 to help finance the response to the Covid-19 crisis, and we expect this type of issuance to continue, especially from supranationals and agencies,” says Katugampola.

“Meanwhile, we anticipate that environmental considerations will feature heavily as part of the global recovery, driven by green policy agendas across regions, and anticipate Green Bond supply from autos, infrastructure, real estate, transportation, chemicals, financials, TMT and utilities.”

Demand for sustainable investment products is also surging, with Morningstar data showing that investors poured a record USD20.6 billion into US sustainable investment funds in 2019, almost quadruple the inflows seen in the previous year.T