Morgan Stanley Maximizing Capital The Indigo Group
Maximizing Capital The Indigo Group at Morgan Stanley 2
What Is Investing with Impact? Morgan Stanley defines Investing with Impact as an approach that aims to generate marketrate financial returns while demonstrating positive environmental and/or social impact. Financial Goals Financial performance driven by economic fundamentals Investing with Impact Impact Goals Positive social and/or environmental outcomes driven by values and mission Delivering innovative solutions for our clients that align their personal values with their financial goals is an important focus for Morgan Stanley, and I believe we are uniquely suited to do this. James Gorman Morgan Stanley Chairman and CEO 3
The Evolution of Investing with Impact Approaches SOCIALLY RESPONSIBLE INVESTING & VALUES ALIGNMENT 1970s on ESG INTEGRATION 1 1990s on IMPACT INVESTING 2000s on Investing with Impact Investing with Impact incorporates a variety of terms and investment approaches that have evolved significantly in the past few years. US-based assets incorporating these approaches have increased 76% in the last two years alone. Sustainable, Responsible and Impact Investing in US 1995-2014 2 $ billions 7000 6000 ESG Incorporation Total 5000 4000 3000 2000 1000 0 1995 1997 1999 2001 2003 2005 2007 2010 2012 2014 1 ESG = Environmental, Social and Governance 2 Report on the Sustainable and Responsible Investing Trends in the United States, 2014. US SIF Foundation, Nov. 2014 4
Investing with Impact Across The Business Morgan Stanley Institute for Sustainable Investing Wealth Management Investing with Impact Platform - 127 products on platform - 56 covered by GIMA (including extension strategies) Clients / FA teams - Client acquisition / retention - More than 1,200 FAs engaged Model portfolios - Balanced & Equity in Select UMA - Sustainable Impact Equity Model - Impact Pools in MS GIFT DAF Investment Management AIP - Alternative Investment Partners - Hired former CIO of IFC - Currently raising impact fund of funds Merchant Banking - Deepening sustainability of Prime Property Fund United Nations Principals for Responsible Investing Signatory Institutional Securities S + R Research - ESG integration into equity valuation and analysis - Thematic reports highlighting investment opportunities around sustainability Green bonds - #2 underwriter 2013-2015 (YTD)* IBD and IED - Partnering on client engagement and presentations Firm Values and Culture Sustainable Investing Challenge Sustainable Investing Fellows Environmental & Social Finance Forum FCLT Initiative * Dealogic: Core Currency Syndicated Green Bonds 2013 To Date 5
How do Sustainable Strategies perform? The Institute for Sustainable Investing recently published a report that found that sustainable investments usually met, but often exceeded the performance of traditional investments The report evaluated performance of 10,000 mutual funds and 2,800 Separately Managed Accounts over the last 7 years. Key findings include*: Equity mutual funds met/exceeded median returns and met/fell below median volatility of traditional funds for 64% of the periods examined, compared to their traditional counterparts. Long-term annual returns of one index (MSCI KLD 400 Social Index) comprising companies scoring highly on ESG criteria exceeded the S&P 500 by 45 basis points since its inception in 1990 (10.14% compared to 9.69% for the S&P 500; July 1990 December 2014). Positive relationship between corporate investment in sustainability and stock price and operational performance. * Morgan Stanley Institute for Sustainable Investing * Sustainable Reality, February 2015 6
Investment Performance The MSCI KLD 400 Index invests in companies that meet best-in-class environmental, social and governance (ESG) criteria and have delivered favorable performance with comparable risk relative to the S&P 500 Index. Annualized Return (%) MSCI KLD 400 Social Index 10.14 S&P 500 Index 9.69 Cumulative Excess Return vs. S&P 500 Index Assets in sustainable and responsible investments now total $6.57 trillion, or nearly 1 in every 6 dollars in the U.S.* Sources: Zephyr Analytics and Report on the Sustainable and Responsible Investing Trends in the United States, 2014. US SIF Foundation, 2014. *This number excludes separately managed accounts. Note: Past performance is not a guarantee of comparable future results. The index returns are illustrative and shown for comparative purposes only. They do not represent the performance of any specific investments. An investor cannot invest directly in an index. 7
Myth vs. Reality Myth: Investing with Impact means sacrificing returns Reality: Analysis of Morningstar data tracking self-described sustainable equity mutual funds vs. the universe of traditional funds, found that sustainable funds often performed better and had lower volatility than their category median. 1 Myth: Investing with Impact is a niche area Reality: Sustainably invested assets now account for more than one out of every six dollars under professional management in the US. 2 Myth: Investing with Impact investment products are limited Reality: In 2014, 925 distinct funds, representing $4.31 trillion in assets incorporated ESG criteria, more than four times the $1.01 trillion tracked in 2012. 2 1 Morgan Stanley Institute for Sustainable Investing Sustainable Reality, February 2015. 2 Report on the Sustainable and Responsible Investing Trends in the United States, 2014. US SIF Foundation, November 2014.. 8
Reporting Standards Key players in Sustainability Reporting Global Reporting Initiative (GRI) Founded in 1997 Carbon Disclosure Project (CDP) Founded in 2000 International Integrated Reporting Council (IIRC) International Integrated Reporting Council (IIRC) Founded in 2010 Sustainability Accounting Standards Board (SASB) Founded in 2012 9
Making the Cut Here are a few of the asset managers on our platform. Trillium Asset Management Allianz Global Investors Great Lakes Advisors Breckenridge Capital Advisors PAX World Investments Community Capital Management Calvert Investments ClearBridge Investments Touchstone Investments Rockefeller & Co Riverbridge Partners Guggenheim Video: Capital Creates Change Morgan Stanley s commitment to clients, harnessing the capital needed to create change. Video: James Gorman Launches Institute for Sustainable Investing Video: Audrey Choi, Chief Executive Officer, Institute for Sustainable Investing, Morgan Stanley Disclaimer: Please be advised by clicking on a third party URL or hyperlink, you will leave morganstanley.com. Morgan Stanley Smith Barney LLC is not implying an affiliation, sponsorship, endorsement with/of the third party or that any monitoring is being done by Morgan Stanley of any information contained within the web site. Morgan Stanley is not responsible for the information contained on the third party web site or your use of or inability to use such site. Nor do we guarantee their accuracy and completeness 10
Investment Opportunities Across Mission Objectives Energy and the Environment Global Development Food, Health and Well-Being Education Communities Global population facing resource scarcity, increasing climate change and pollution concerns, and high potential for biodiversity loss Global clean technology venture investment totaled $6.8Bn in 2013 (1) More than 1 in 5 people in the world live on less than $1.25 (2) a day and lack access to basic goods and services Strong growth differential: GDP growth of 5.4% vs. 0.8% for developed world (3) Low-income zip codes have 25% fewer chain supermarkets than middleincome codes (5) Medical bills account for majority of personal bankruptcies in the US (4) 65% of consumers seek environmentally or socially responsible products (6) Mounting evidence for the continuing achievement gap between US students and international peers; and, in US, low income students versus middle class students Growing potential with education representing 9% of U.S. GDP, but <1% of venture and public market capitalization (7) 1 in 3 Americans live in low-income areas, but only 12% of long-term loans and 24% of small business loans are made in these neighborhoods (8) More than 100 U.S.-based alternative investment funds managing $77B report that they consider community-related investment criteria (9) (1) Cleantech Group. (2014). Global Clean Technology Venture Investment Totals $6.8Bn in 2013 (2) World Bank (2014). Highlights: World Development Indicators 2014. (3) Fiduciary Trust Company International (2012). This Recovery Has Legs. News and Insights: First Quarter 2012 Perspective. (4) NerdWallet Health (2014). Findings based on data from analyzed data from the U.S. Census, Centers for Disease Control, the federal court system and the Commonwealth Fund. (5) PolicyLInk (2010). The Grocery Gap: Who Has Access to Healthy Food and Why It Matters. (6) BBMG (2012). Rethinking Consumption: Consumers and the Future of Sustainability. (7) Global Silicon Valley Advisors (2012) Fall of the Wall: Capital Flows to Education Innovation. (8) US Department of the Treasury (2013). CDFI Fund Fiscal Year 2012 Annual Review. (9) US SIF Foundation (2012). Report on Sustainable and Responsible Investing in the United States. 11
Investing with Impact Actionable Themes Products, Portfolios, Tools and Resources can be used individually or in concert to activate portfolios designed to meet a variety of impact goals - either in select allocations or across the entire portfolio. Current thematic examples include: Faith-Based Investing Align investment portfolio with principles in accordance with specific religious values Fossil Fuel Aware Investing Support the transition to a lower carbon economy by considering fossil fuel exposures in portfolios Mission-Aligned Investing Activate investment portfolio to amplify the impact of personal or organizational mission 12
INVESTMENT EXAMPLES IMPACT INVESTMENT CHARACTERISTICS DEFINITION Investing with Impact Framework Morgan Stanley s Investing with Impact Framework enables clients to align investment decisions with impact priorities across their portfolio. Minimize Objectionable Impact VALUES ALIGNMENT Managing exposures by intentionally avoiding investments based on specific criteria Proactively considering ESG criteria alongside financial analysis to identify opportunities and risks during investment process Focusing on themes and sectors dedicated to solving sustainability-related domestic and global challenges Targeted Impact ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) INTEGRATION SECTOR EXPOSURE IMPACT INVESTING Allocating to investment funds focused on private enterprises structured to deliver specific positive social and/or environmental impacts Public equity, Public fixed income, alternatives Differentiated by restriction criteria and degree of shareholder advocacy Not proactively seeking environmental and social impact Public equity and public fixed income Differentiated by ESG integration process and degree of shareholder advocacy May also include screens Public equity and public fixed income Differentiated by macroanalysis, sustainability research and sector focus Differentiated by impact approach, regional focus, liquidity and impact reporting May have investor restrictions Mutual fund that excludes companies from buy universe (e.g. tobacco, firearms, coal mining companies) Separately Managed Account (SMA) incorporating analysis of ESG performance into stock selection process Exchange-traded fund (ETF) tracking index of renewable energy companies A private equity fund focused on emerging consumers or project level renewable energy investment. PUBLIC MARKETS PRIVATE MARKETS 13
Getting Started DISCOVERY PROCESS ARTICULATE AND IDENTIFY INVESTING WITH IMPACT GOALS Determine what causes and issue areas are of particular interest Identify which aspects of the Investing with Impact Framework are compelling ESTABLISH INVESTMENT PLAN Document investment strategy alongside impact goals EVALUATE EXISTING PORTFOLIO USING IMPACT LENS Evaluate existing investments and exposures in comparison to impact goals DEVELOP IMPLEMENTATION STRATEGY Determine portfolio approach to integrating impact while considering risk/return priorities Decide between allocating percentage of total assets or committing to fully incorporating impact across all asset classes Identify the Investing with Impact solution that makes sense to integrate into your investment portfolio RE-EVALUATE ON AN ONGOING BASIS Plan to review your portfolio for alignment with financial and impact goals on a regular basis, making adjustments as appropriate 14
Discovery Process Questions to Consider INDIVIDUALS What values and issue areas matter most to you and your family? What organizations and causes do you and your family support through philanthropy and/or community service? Are your investments aligned? What long-term challenges do you want to help solve with your investments? Do you know what companies, industries and geographies your investment portfolio currently supports? Are any holdings of particular concern? Are any of those investments supporting positive impact? Do you favor investments capable of delivering broad-based positive impact, thematic impact or prefer solutions customized to your personal value set? INSTITUTIONS Do you have an understanding of how your current portfolio relates to your mission? What challenges does your organization help solve? How can these be addressed through investments? Does your organization have a mission-aligned Investment Policy Statement? 15
Investing with Impact Thought Leadership A suite of research, white papers and educational material to navigate impact approaches 16
Disclosures INDEX DEFINITIONS S&P 500 Index Regarded as the best single gauge of the US equities market, this capitalization-weighted index includes a representative sample of 500 leading companies in leading industries of the US economy. MSCI KLD 400 Social Index The MSCI KLD 400 Social Index is a market capitalization-weighted Common Stock Index, consisting of 400 corporations that have passed multiple, broadbased social screens. The index is maintained by Kinder, Lydenberg, Domini & Co., Inc. and is intended to serve as a proxy and benchmark for the universe of stocks from which social investors might choose. The index was set at a value of 100 as of May 1, 1990. Since its inception, fewer than one change per month has been made in the index, primarily due to takeovers and acquisitions Although the statements of fact and data in this presentation have been obtained from, and are based upon, sources that Morgan Stanley believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions are as of the date of this presentation and are subject to change without notice. This presentation is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. 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. The securities discussed in this material may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances and objectives. Past performance is not a guarantee of future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing in the markets entails the risk of market volatility. The value of all types of securities, including mutual funds and exchange-traded funds (ETFs), may increase or decrease over varying time periods. 17
Disclosures The information herein has been obtained from sources that we believe to be reliable, but we do not guarantee its accuracy or completeness. All opinions included in this material constitute the Firm s judgment as of the date of this material and are subject to change without notice. This material is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Morgan Stanley offers investment program services through a variety of investment programs, which are opened pursuant to written client agreements. Each program offers investment managers, funds and features that are not available in other programs; conversely, some investment managers, funds or investment strategies may be available in more than one program. Morgan Stanley s investment advisory programs may require a minimum asset level and, depending on your specific investment objectives and financial position, may not be suitable for you. We offer these securities and/or deposits subject to availability. Market price, yield and ratings are subject to change. The market value of securities and/or deposits will fluctuate, and if sold prior to maturity, investors may receive more or less than their original purchase price or maturity value, depending on market conditions. Callable securities and/or deposits may be redeemed by the issuer prior to maturity. Additional call features may exist that could affect yield. Please consult your Financial Advisor regarding applicable call provisions prior to investing. Some issue information is based on data obtained by the firm from external sources deemed to be reliable. However, Morgan Stanley Wealth Management has not independently verified such information and makes no warranty, express or implied, regarding its accuracy or completeness. Bonds rated at less than investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility. High yield bonds should comprise only a limited portion of a balanced portfolio. Investors should match credit ratings to their risk profiles. The annual income and cash flow summaries are based on security and/or deposit terms, and are subject to actual payment by the security and/or deposit issuers. Although the securities and/or deposits may be offered in a proposed group, it is each investor's decision as to which, if any, of the security and/or deposit to buy. Upon purchase, each investor owns, and may sell, each security and/or deposit on an individual basis as he or she desires. There is no portfolio management. Price quoted may not include sales commissions. For additional information on any of the highlighted securities and/or deposits, please contact your Morgan Stanley Financial Advisor. Participation in the program does not protect the portfolio from downside risk. The investor retains full downside exposure to the portfolio. The downside protection afforded by call writing is limited to the amount of the premium received less the costs incurred to settle index options. The Program only provides a hedge to the extent of those premiums received. The loss for the investor could be the current value of the portfolio less the net premium received from the call options. Portfolio holdings may need to be sold to generate cash to settle call options. The sale of portfolio holdings may produce tax consequences for U.S. taxpayers. There is no assurance that the revenue received from the program will exceed the fees and expenses paid. If a secondary market in options becomes unavailable and prevents a closing transaction, the options writer's obligation would remain until expiration or assignment. 18