Very few companies make the grade to be included in the Global Sustain portfolio, in our view.
One of the highest-quality ESG-integrated portfolios available to investors. We only invest in businesses we believe can generate high, sustainable future returns on operating capital. These high-quality companies are extraordinarily rare.
The resulting Global Sustain portfolio compares favorably to ESG peers in terms of two key quality metrics: margin stability and returns on operating capital
Quality: It’s all about sustainability of returns
We explicitly exclude capital-intensive, low-return companies because they are unable to sustain high returns on operating capital. Energy and materials companies, for example, are too cyclical to meet our requirements. Even utilities, which are less cyclical, fail to generate sufficient returns on capital due to their massive amounts of capital and equipment.
Instead, we target high-return on capital, non-cyclical companies with pricing power. Many are found in the technology, health care and consumer-oriented sectors, which tend to pollute less. We believe Global Sustain is, therefore, an inherently low-carbon portfolio. Its carbon footprint is less than 30% of the MSCI World Index (left chart).
Carbon intensity scores, however, do not drive our security selection. We first screen the universe for high-quality companies with attractive valuations. As part of our fundamental research and engagement with companies, we consider – on a case-by-case basis, where appropriate – material environmental or social or governance issues that have the potential to either enhance or disrupt a company’s sustainability of returns. These issues include energy sources for data centers, the sustainability of supply chains, packaging for fast-moving consumer goods companies, consumer relevance, data privacy/security and product quality.
A portfolio that avoids controversial sectors
Global Sustain is tobacco-free, alcohol-free and free of fossil fuels. The most capital-intensive sectors – commodities, fossil fuels, utilities and weapons – are naturally excluded because they are too cyclical to meet our criteria. The resulting Global Sustain portfolio compares favorably to ESG peers in terms of two key quality metrics: margin stability and returns on operating capital (right chart).
Source: Factset, MSCI ESG, Morgan Stanley Investment Management; as of December 31, 2018. 1 MSCI ESG Research defines a portfolio’s carbon footprint as the carbon emissions (Scope 1 and 2) of a portfolio per million dollars invested. They sum up all the emissions in a portfolio based on the investor’s ownership share, using reported or estimated emissions data. 2 ROOCE (Return Operating Capital Employed) = EBITA (Earnings Before Interest, Taxes and Amortization)/PPE (Property, Plant, Equipment) + Trade Working Capital (excludes goodwill). ex-Financials. Margin Stability is based on earnings before interest and taxes and is calculated using this formula: (1-(std deviation)/mean)). 10 year averages to December 31, 2018.
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RISK CONSIDERATIONS
There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy's assets were invested in a wider variety of companies. In general, equity securities' values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. Nondiversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Illiquid securities may be more difficult to sell and value than public traded securities (liquidity risk).
INDEX INFORMATION
The MSCI World Index is a free float adjusted market capitalization weighted index that is designed to measure the global equity market performance of developed markets. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The index is unmanaged and does not include any expenses, fees or sales charges. It is not possible to invest directly in an index.
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There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Prior to investing, investors should carefully review the strategy’s / product’s relevant offering document. There are important differences in how the strategy is carried out in each of the investment vehicles.
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