Morgan Stanley
  • Investment Management
  • Oct 2, 2018

Measuring Impact, By the Numbers

By combining both impact scores and tangible measurements like tonnage of greenhouse gases avoided, asset managers are helping investors see the true impact of their sustainable investments.

As interest in sustainable investing grows, both retail and institutional investors have become focused on metrics for success beyond benchmark-beating financial returns. Investors who are passionate about impact investing want to know that their portfolio has a payoff for society, whether that means lower carbon emissions, affordable and clean energy, climate action or other goals.

'Tangible' metrics give investors and institutions the ability to make clear decisions based on both return potential and mission alignment.

But the question is how to uniformly measure impact and share metrics in an easy-to-understand fashion. While traditional investing relies on well-established metrics such as return, risk and volatility, measuring the true “impact” of a portfolio or company can be more challenging.

The primary method is sustainability ratings or scoring calculated by in-house or third-party providers, but according to Rui de Figueiredo, chair of the Morgan Stanley Investment Management Sustainable Investing Council, increasingly, investors want more than abstract scores. “While traditional scoring of assets using ESG criteria is certainly beneficial and has historically been focused on the risk or exposure side of investments, we believe that ESG scores have the potential to be more valuable when paired with tangible metrics such as the amount of carbon emissions reduced when choosing a portfolio with a climate orientation."

In response to investors and asset owners, and in partnership with Morgan Stanley’s Institute for Sustainable Investing, Morgan Stanley Investment Management is exploring ways to show tangible benefits from portfolios, using common measures that can be understood by anyone.

Impact Investing Comes of Age

Efforts to quantify the non-financial benefits of an investment portfolio come at a time when growing numbers of investors want their portfolios to serve the dual purposes of generating both returns and positive change. Globally, more than $1 in $4 under professional management is invested “sustainably,''1 a broad term which suggests that investors are taking environment, social and governance considerations into account when purchasing assets.

A recent study conducted by Morgan Stanley of 120 institutional investors concluded that 70% have integrated sustainable investment criteria into their decision-making, and an additional 14% are actively considering it.2

But impact is key. “Clients are saying that they care about returns and they also care about these other dimensions," de Figueiredo says. “One institution may emphasize climate change. Another might emphasize gender diversity. As portfolio managers, it’s our job to understand the various issues that are important to clients, then tailor ESG approaches in ways that make sense for specific investment strategies. It’s not enough to just blindly look at aggregate scores.''

What’s In a Number?

Current ESG scoring assigns values to a company’s performance across hundreds of criteria under themes such as greenhouse gas emissions and the diversity of a company’s workforce. These scores are then aggregated and weighted to generate an overall score and sub-scores for a company’s performance. While this scoring method makes it easy to compare Company A’s performance vs. Company B’s performance, ESG scoring is still somewhat abstract for investors new to the space.

“Tangible” metrics, however, give investors and institutions the ability to make investment decisions based on both return potential and mission alignment.  One metric might be the precise steps taken to make a property in a real-estate portfolio environmentally efficient.  Other metrics could be cubic meters of water conserved or number of women in company boardrooms across a portfolio.  

“These numbers have the potential to be more meaningful to clients than just saying that a portfolio's impact score has gone from one index number to another index number," in de Figueiredo’s view.  

Measuring Global Change

De Figueiredo, who also serves as co-head and chief investment officer of Investment Management’s Solutions and Multi-Asset Group, says that the firm's increased focus on tangible metrics has also found widespread applications in emerging markets ranging from Asia to Latin America.

“This is a constantly evolving effort, but in the end, if investors aim for impact, the goal is economic development and provision of basic services to certain target markets, such as greater employment among the poor, improving access to education, and reducing economic inequity," de Figueiredo adds. “We want to measure what impacts the companies in the portfolio are having on those dimensions and report it to our clients.''

Although a recent survey showed that 16% of investors described a lack of knowledge as their biggest challenge to adopting impact investing by and large, they expressed interest in learning more about these investing approaches. Tangible measurement is another key to educating investors and institutions and increasing the impact of their investments.

Footnotes

1 2016 Global Sustainable Investment Review, a report of the Global Sustainable Investment Alliance

2 Morgan Stanley, Sustainable Investment Asset Owner Survey, February 1, 2018

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