NEW YORK – More people are looking for investments that not only rise in value but also hold true to their personal values.
Enter sustainable mutual funds, which are also referred to as socially responsible funds or impact investments. Just as a traditional investor would, managers of these funds weigh a company's sales and profits before buying a stock or bond. But they also look at how it's affecting the broader world, such as whether the company is harming or helping the environment. Some aim to buy bonds that support clean-water efforts, or stocks of companies with higher percentages of women executives. Others avoid companies that make money from tobacco or gambling.
Continue Reading Below
Investors are increasingly putting their money behind such causes. The total stood at $6.5 trillion at the beginning of 2014, according to the latest tally by the Forum for Sustainable and Responsible Investment, an industry group. That's up 76 percent in two years, and represents more than $1 out of every $6 under professional management in the U.S.
The growth is part of a virtuous cycle, says Audrey Choi, chief executive of Morgan Stanley's Institute for Sustainable Investing. Rising interest in sustainable investing pushes the industry to offer more mutual funds designed to meet the demand. And a wider menu of options helps drive even more interest in sustainable investing.
Morgan Stanley created the institute in November 2013, and it recently released a survey showing that the majority of individual investors -- 71 percent -- are interested in sustainable investing. Younger people and women are leading the way. Choi recently spoke about where the field is headed. Questions and answers have been edited for clarity and length.
Q: Aren't younger people always more interested in sustainability? Will they lose interest as they get older, as their parents perhaps did?
A: Younger people are a bit more optimistic, but this seems to be more of a generational characteristic. From this survey, we saw concrete evidence about how they're translating their beliefs into behavior. They're already twice as likely to check product packaging about sustainability and three times as likely to choose a job with a company with a sustainable stance. They're twice as likely to leave an investment if they don't agree with the philosophy.
This is definitely a space we're going to continue to be watching given the size of the millennial generation and how they're beginning to get their investment lives going. Millennials are due to inherit over $35 trillion of wealth.
Q: And Wall Street is paying attention, given how much money millennials are set to control?
A: There has been a real growth in products that are available. You're seeing very large, mainstream providers offer products that factor sustainability into it. With this increasingly robust set of offerings and the increased interest in sustainable investing, the two factors are really going to help reinforce each other.
Q. If there's all this interest, what's holding sustainable investing back?
A: There is still a perception that investors have to choose between return expectations and sustainability. We found that 54 percent of people think there is a trade-off between profitability and sustainability.
Q: This is the first year you've done the survey, so you don't know for sure, but do you think that percentage has been going up or down?
A: My inclination is that we'll see that coming down. My guess is that in the past there was a large perception that ethical investors don't have the same return expectations, and now it's close to even.
Q: So sustainable investing doesn't necessarily mean lower returns?
A: Stepping back from the survey and talking about Morgan Stanley, fundamental to the reason for why we launched this institute was that we believe sustainable investing is sound investing. We believe that it can be only beneficial to think about long-term trends, environmental impact and social impact as you examine the opportunities and potential risks around investments. We think sustainable investing is going to be increasingly pervasive, with all the same rigor and discipline that you want all investing to be characterized by.
Q: Do you find that investors getting into sustainable investing are quicker to pull their dollars at the first sign of trouble than from "traditional" investments?
A: I have not seen that. Investors may take longer to research their decision before making an investment of this kind, especially when they're first starting out, so I think they take the decision quite seriously and soberly and don't see it as one day they're in, and one day they're out.
We're really excited by the growth of the field, both from institutional dollars going this way but also individual investors. We're hopefully seeing a long and sustainable trend here.
Continue Reading Below