Impact investing is associated more with niche players than Wall Street giants. So what’s brought Morgan Stanley into this market? David Wilton, Managing Director for Morgan Stanley Alternative Investments, spoke with Frontera Managing Editor Gavin Serkin for this week’s Expert Q&A.
David: Morgan Stanley as a whole thinks sustainable investing is going to be a growth area in the next 20 years. So, about four years ago, the firm made quite a commitment to growing its business in sustainable investing. It started up the Institute for Sustainable Investing, and that has got a very broad mandate. One is for Morgan Stanley to produce products aligned with a sustainable mandate.
Gavin: What are the ways to measure that sustainable mandate? It’s easier to measure investment returns than sustainability.
David: Sustainability covers many different strategies. You’ve got socially responsible investing. That’s been around for a long time. You’re simply putting negative filters over your portfolio, filtering out things that you find objectionable. Even back in the ’80s, people were filtering out things like alcohol and weapons. It’s a strategy used in a whole host of markets.
Then, in the last ten years, people brought in ESG – environment, social, governance. That’s an overlay to make sure that the company it’s investing in is compliant with local labor and environmental laws.
Impact goes a step further than that, incorporating ESG and some elements of SRI, but then for each investment, what you’re looking for are companies that, over the investment period, are going to produce positive social outcomes. Either they’re going to create jobs or they’re going to create access to something that will boost people’s lives, like education and healthcare or loans for houses. Or, they’re going to have a positive impact on the environment.
Now, of course, you can either do that with a low return profile, giving much more specific focus to impact, or you can look at it from a commercial profile. If you’re looking to do it fully commercial, what you need are investments that are scalable, high quality. What that basically comes down to is helping faster growing SMEs located near lower income populations, or directly addressing the environment, which are creating good quality jobs, housing, education.
Gavin: What are the types of projects that fit with this strategy?
David: It’s actually a pretty wide pool you can select from. If you look at global strategy – and you can do this in the US, Europe or emerging markets, but if you just look at the emerging markets side of it – you’re looking to help SMEs get scalability. That generally pushes you into funds under $500 million. And according to EMPEA, the Emerging Market Private Equity Association, over the last four years, there were over about 700 funds within that profile that actually closed. So, you do have a reasonably broad pool to source from.
Gavin: Can you give an idea of the countries, the sectors, that fit best?
David: In a US or European context, you’re obviously not starting off in a high-impact, low-income population, so in those markets it’s anything to do with the environment that meets the impact criteria. Otherwise, it’s a matter of very carefully searching for venture capital funds that, when you look at what they’re doing, most of their projects meet the lower-income criteria.
When you go to emerging markets, almost by definition, most of the companies you’re looking at are serving a lower income population, so it meets the location test. And then what you’re looking for are those fast growing companies. In development speak, they’re called gazelles. They’re really growing faster than the rest, therefore creating most of the jobs, most of the new hospital beds, most of the new school buses.