As sustainability becomes an essential part of business strategy, all eyes are on the finance world: How can investment strategy help drive long-term change?
As one of the first sustainability officers on Wall Street, Choi has seen the tide shift toward climate-centered business and investing. “Sustainability is now increasingly a driver of whether you can attract talent, retain talent, retain customers, and retain investors,” Choi said.
However, lasting cross-sector change buoyed by the finance world is going to require commitment from every industry.
“We’re not going to solve climate change or any of these sustainability issues unless it’s a complete economy, cross-sector engagement. Thinking about energy and a sustainable climate and sustainable planet really has to be something that all sectors are involved in,” said Choi, who is also founding CEO of Morgan Stanley’s Institute for Sustainable Investing.
Finance is at the beginning of this “chain of influence,” Jay said, providing the fuel across all sectors in the form of capital. One notable example that the industry is taking notice: the 2021 Glasgow Financial Alliance for Net Zero, a financial-sector-specific coalition for net-zero initiatives.
Here are key takeaways from their talk:
Millennials show the way forward
The growing investor interest in sustainability has been mainly led by young investors, Choi said, many of whom are women. An October 2021 Morgan Stanley survey led by Choi’s Institute for Sustainable Investing found that 99% of millennials are interested in sustainable investing.
“This happens in everything in life: Our kids show us the way first. Secondly, inquiry, curiosity, and intent precede commitment. And commitment often precedes actual ability to implement,” she said.
The survey also showed that mainstream interest — not just among young people — has persisted despite the market volatility caused by COVID-19, suggesting a broader mindset shift.
In large part, prior ennui was driven by the problem’s sheer magnitude: People felt like they were “pushing on a string to save the planet,” she said. Now, with more demand, the dominos have begun to tip — what Choi likened to “pushing on the corner of a tube of toothpaste.”
As youthful voices grow louder, “Suddenly it’s a market signal. Suddenly, it’s a demand curve. Suddenly, there is huge addressable market for product,” she said, leading financial leaders to make commitments such as the Glasgow alliance. Once the financial firmament realized that sustainability was a priority, action began.
“That’s the exciting part of where we are now,” she said.
Choi is optimistic about companies making net-zero pledges, but she’s also realistic.
“It’s super hard for anyone to make a commitment for a corporate strategy for 2050,” she said. “That's an incredibly long period of time, and corporations and shareholders are not used to those kinds of timeframes.”
Proposed SEC rule changes can light a fire under Wall Street
In March, the SEC proposed rule changes that would require registrants to include climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks and disclosure of a registrant’s greenhouse gas emissions.
Choi called it “incredibly prolific” and “amazing” in terms of signaling to chief risk and financial officers that non-sustainable behavior has consequences.
“Clearly … regulators have seen that climate is a risk factor to business that cannot be ignored,” she said. “You cannot be a responsible business presenting what you believe to be your financial statements and your risks and opportunities in a clear, transparent, and reliable way without at least considering [climate risks]. … No savvy investor is going to want to make investments without being able to have comparable transparent data to make that judgment on.”
Cross-sector collaboration is key
No single company is going to be able to achieve sustainability goals through actions entirely under their own span of control, Choi said. An aspiring net-zero real estate company, for example, will need to partner with innovators to develop the right water flows, air flows, and net-zero concrete.
“What’s really exciting is that you’re now seeing this align: All these industries, sectors, and companies saying, ‘We don’t know exactly how we’re getting to the promised land, but we’re frankly all on the hook with regulators, the public, and our shareholders to get there,’” she said.
One such example of collaboration is the MIT Climate and Sustainability Consortium, comprising member companies across key sectors, many of which have committed to carbon neutrality by 2030. They include Apple, Biogen, Boeing, and IBM.
Companies need to share solutions to have global impact. “Across industries, we need to really redefine how we think about innovation as a competitive advantage,” Choi said.
“Innovators and people who invest in R&D should absolutely be rewarded for their innovation and their ingenuity, [but] we need to try to figure out how to get that ingenuity deployed as broadly as possible,” Choi said. “I'm not trying to say no [intellectual property]. I'm just saying, let’s figure out how we can spread those innovations as widely as possible.”
ESG integration has financial upsides
ESG integration — the practice of weaving environmental, social, and governmental factors into investment decisions — might seem relatively amorphous and not directly applicable to a strong bottom line.
Companies that embrace this tactic, however, appear to have a true financial edge. In 2021, 61% of Morningstar’s ESG-screened indexes outperformed their broad market counterparts globally and across all markets,
“Investors are focused on ESG integration precisely because we have seen a lot of evidence that shows that the companies who do think holistically about environmental issues, social issues, and of course, governance issues … actually have competitive returns and also tend to have … significantly lowered downside volatility,” she said.
Every little bit of investment counts
Morgan Stanley has offered a low-dollar minimum portfolio that invests in companies aligning with plastic waste reduction. At first, people were skeptical about effecting change with a minimum investment of $10,000, she said. But it exploded.
“It became one of the fastest-growing products that we put on the platform, because these small, little $10,000 chunks really do add up. And so I’m very much in that camp of: You never know which last grain of sand is going to tip the balance,” Choi said. “Even just any of us voting our shares and using our shareholder power? That’s what actually changes corporate behavior.”