Morgan Stanley
  • Institute for Sustainable Investing
  • Jan 26, 2024

Individual Investors’ Interest in Sustainability Is on the Rise

More than half of individual investors say they plan to increase their allocations to sustainable investments in the next year, while more than 70% believe strong ESG practices can lead to higher returns.

Individual investor interest in sustainability is on the rise, according to survey findings in a new “Sustainable Signals” report by the Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Wealth Management. More than three quarters (77%) of individual investors globally say they are interested in investing in companies or funds that aim to achieve market-rate financial returns while also considering positive social and/or environmental impact. In addition, more than half (57%) say their interest has increased in the last two years, while 54% say they anticipate boosting allocations to sustainable investments in the next year.

More than Half of Investors Say they Plan to Increase Sustainable Investments in Next 12 Months

Source: Morgan Stanley Institute for Sustainable Investing, January 2024

Investors cited that their growing interest in sustainable investing is due to factors including new climate science findings (53%) and the financial performance of sustainable investments (52%).1 A majority of investors also believe that companies should address environmental and social issues.

“Nearly 80% of individual investors believe that it is possible to balance market rate financial returns with a focus on sustainability,” says Jessica Alsford, Morgan Stanley’s Chief Sustainability Officer and CEO of the Institute for Sustainable Investing. “These investors express a desire for their investments to advance positive environmental and social impact, creating opportunities for finance professionals to meet these needs.”

Climate Action: Investors’ Top Sustainable Investing Issue

When asked to pick their top sustainable investing theme, investors prioritized climate action with 15% ranking it first, followed by healthcare (13%), water solutions (11%) and circular economy (11%).

Top Sustainable Investing Themes Ranked

Source: Morgan Stanley Institute for Sustainable Investing, January 2024

When making a new investment, nearly 80% of global investors consider a company’s reporting on its carbon footprint and commitment to reducing greenhouse gas emissions. This doesn’t necessarily imply that traditional energy companies are out of scope; 51% would consider investing in traditional energy companies as long as they have robust plans to reduce their emissions and address climate change. This holds true even for investors who are very interested in sustainable investing (62%) and those who rate climate action as a top investment interest. Just 21% of global investors would avoid traditional energy companies altogether on climate grounds, indicating that investors may be open to supporting companies with a clear transition plan in place.

Instead, investors want companies to demonstrate how they are proactively planning to protect long-term value, how they will achieve decarbonization strategies and how they will pivot business models to align with the requirements of climate science.

Investors are also interested in finding ways to reduce the carbon footprint of their own portfolios. More than 60% of investors would be likely to purchase carbon offsets if they were available.

Investor Concerns About ESG Data and Greenwashing

When asked what prevents investors from making sustainable investments, survey respondents cited the lack of transparency and trust in reported ESG data and concerns about the potential for “greenwashing,” or the representation of investments as being more sustainable than they are.

Top Barriers to Sustainable Investing

Source: Morgan Stanley Institute for Sustainable Investing, January 2024

Investors also cite uncertainty about investing in social themes. More than half (58%) indicate that they are likely to invest in companies that target specific positive environmental or social objectives. When asked about current or planned investments, environmental solutions are more popular than social themes, even though most investors say that it is a priority for their investments to minimize negative social impact and advance positive results. Social themes ranked more highly when investors were asked to identify areas they were interested in but didn’t know where to begin. The lower interest could reflect investor sentiment toward a less developed market for social funds compared to environmental.

Investors may benefit from more guidance and support from investment professionals: 52% say they have limited knowledge about how to start investing sustainably and 43% say they lack financial advice. Financial advisors or investment platforms could benefit from supporting these investors, as 58% of global investors say that they would be likely to select an FA or investment platform based on their sustainable investment offerings.

Footnotes:

1 Sustainable Funds Beating Peers in 2023, https://www.morganstanley.com/ideas/sustainable-funds-performance-2023

Disclosures:

This material was published in January 2024 and has been prepared for informational purposes only and is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley Research Department and is not a Research Report as defined under FINRA regulations. This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley Smith Barney LLC and Morgan Stanley & Co. LLC (collectively, “Morgan Stanley”), Members SIPC, recommend that recipients should determine, in consultation with their own investment, legal, tax, regulatory and accounting advisors, the economic risks and merits, as well as the legal, tax, regulatory and accounting characteristics and consequences, of the transaction or strategy referenced in any materials. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Morgan Stanley, its affiliates, employees and Morgan Stanley Financial Advisors do not provide tax, accounting or legal advice. Individuals should consult their tax advisor for matters involving taxation and tax planning, and their attorney for matters involving legal matters. Certain statements herein may be “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts or statements of current conditions, but instead are based on management’s current expectations and are subject to uncertainty and changes in circumstances. These statements are not guarantees of future results or occurrences and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict and are often beyond our control. Any forward-looking statements made by or on behalf of Morgan Stanley speak only as to the date they are made, and Morgan Stanley does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. 

Certain portfolios may include investment holdings deemed Environmental, Social and Governance (“ESG”) investments. For reference, environmental ("E") factors can include, but are not limited to, climate change, pollution, waste, and how an issuer protects and/or conserves natural resources. Social ("S") factors can include, but not are not limited to, how an issuer manages its relationships with individuals, such as its employees, shareholders, and customers as well as its community. Governance ("G") factors can include, but are not limited to, how an issuer operates, such as its leadership composition, pay and incentive structures, internal controls, and the rights of equity and debt holders. You should carefully review an investment product's prospectus or other offering documents, disclosures and/or marketing material to learn more about how it incorporates ESG factors into its investment strategy.  

ESG investments may also be referred to as sustainable investments, impact aware investments, socially responsible investments or diversity, equity, and inclusion (“DEI”) investments.  It is important to understand there are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers.  This is due to a current lack of consistent global reporting and auditing standards as well as differences in definitions, methodologies, processes, data sources and subjectivity among ESG rating providers when determining a rating.  Certain issuers of investments including, but not limited to, separately managed accounts (SMAs), mutual funds and exchange traded-funds (ETFs) may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. Further, socially responsible norms vary by region, and an issuer’s ESG practices or Morgan Stanley’s assessment of an issuer’s ESG practices can change over time.  

Portfolios that include investment holdings deemed ESG investments or that employ ESG screening criteria as part of an overall strategy may experience performance that is lower or higher than a portfolio not employing such practices.  Portfolios with ESG restrictions and strategies as well as ESG investments may  not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results. For risks related to a specific fund, please refer to the fund's prospectus or summary prospectus. 

Investment managers can have different approaches to ESG and can offer strategies that differ from the strategies offered by other investment managers with respect to the same theme or topic. Additionally, when evaluating investments, an investment manager is dependent upon information and data that may be incomplete, inaccurate or unavailable, which could cause the manager to incorrectly assess an investment’s ESG characteristics or performance. Such data or information may be obtained through voluntary or third-party reporting. Morgan Stanley does not verify that such information and data is accurate and makes no representation or warranty as to its accuracy, timeliness, or completeness when evaluating an issuer. This can cause Morgan Stanley to incorrectly assess an issuer’s business practices with respect to its ESG practices. As a result, it is difficult to compare ESG investment products. 

The appropriateness of a particular ESG investment or strategy will depend on an investor’s individual circumstances and objectives. Principal value and return of an investment will fluctuate with changes in market conditions. 

Past performance is not a guarantee or a dependable measure of future results. For risks related to a specific fund, please refer to the fund’s prospectus or summary prospectus. 

CRC 6159567 01/2024

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