In its latest update, Morgan Stanley Investment Management’s International Equity team has highlighted several areas of focus regarding environmental, social, and governance (ESG) considerations in investment decisions.
The team noted that as regulatory and stakeholder expectations around ESG reporting continue to evolve, there is growing demand for technological solutions. This trend offers opportunities for companies that can assist corporate clients in measuring, managing, and reporting their environmental impact. The team engaged with two technology firms within its portfolios where sustainability solutions are seen as a potential long-term growth driver.
The update also discussed the importance of monitoring nature-related risks for companies. Many businesses rely on natural resources and ecosystem services such as water, clean air, and pollination. These resources may become more expensive over time due to regulation and scarcity. The team identified these risks as financially material for a consumer goods company held in its portfolios and engaged with the company to understand how it is addressing these challenges.
Physical risks from climate change were another area of analysis. Companies can face direct damage to physical assets or indirect disruptions through supply chains and logistics. The team reviewed which portfolio companies might be exposed to such risks while also identifying possible opportunities for firms offering commercial solutions to address them.
Regarding climate targets in 2024, the International Equity team stated: “We believe accurate measurement and transparent reporting of carbon emissions is fundamental in enabling companies and investors to understand the size and sources of companies’ emissions, and therefore their potential financially material exposure to climate transition risks, such as carbon taxes. We engaged with two of our companies we had previously engaged with on the subject to see how they were progressing.”
The International Equity team follows an investment process based on fundamental analysis and bottom-up stock selection. They emphasize compounding returns while aiming for reduced downside participation over the long term.
Morgan Stanley Investment Management cautioned that there is no assurance any portfolio will achieve its investment objective. Portfolios are subject to market risk from factors such as economic events or natural disasters that can affect markets or individual securities daily. Other risks include changes in consumer preferences or government regulations impacting global franchise companies more than diversified strategies; foreign investments carry additional currency, political, economic, and market risks; small- and mid-cap stocks may be more volatile; emerging markets pose greater risks than developed ones; derivatives could increase losses; illiquid securities may be harder to sell; non-diversified portfolios could see greater volatility from single issuers; ESG strategies might perform differently compared with other approaches depending on market trends.
The firm stressed: “There is no assurance ESG strategies could result in more favorable investment performance.”
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