Morgan Stanley Casts a Vote of Confidence for ESG Investing

Leading global financial firms are beginning to outline how socially responsible investing can help drive the economic recovery after the COVID-19 outbreak. The latest vote of confidence comes from Morgan Stanley. The firm is pitching investing based on ESG (environmental, social and governance) goals, even before the health crisis peaks in the U.S. and other parts of the world, with a particular focus on green infrastructure.

Morgan Stanley has good news about ESG-lens investing

Financial markets began to wobble by mid-February, when it became clear that the COVID-19 crisis in China would have a global impact. Some countries, notably South Korea and Japan, took lessons learned from China’s experience and applied them with some success. Others, including the U.S., were caught flat-footed and are still scrambling to stem the rising tide of death and suffering.

The Dow Jones Industrial Average dropped more than 8,300 points from February 12 to March 17, landing at 21,237 compared to a high of almost 30,000 before recovering,  somewhat, to 22,327 on March 31.

Even so, on April 2 Morgan Stanley took a look back and spotted “glimmers of green” last month.

On the downside, the COVID-19 crisis has forced some governments to put aside environmental policies for the time being. Morgan Stanley points to the example of the EU Farm to Fork sustainable food initiative and the CORSIA aviation carbon offset program.

However, the firm also noted that decarbonization is a long-term trend of 10 years or more. That means ESG-focused investors would not necessarily be discouraged by a temporary stall in government or industry policies that support green investing.

On the plus side, Morgan Stanley outlined how China and the U.S. are moving toward an infrastructure-building phase of COVID-19 recovery, which has potential for focusing on green projects. That analysis falls in line with other indications that economic recovery from COVID-19 will involve economic decarbonization as well.

As if to reinforce the firm’s outlook, last week New York state — the world’s 11th largest economy — moved forward with an ambitious renewable energy initiative aimed at streamlining the process for permitting new clean power projects.

The Empire State’s push for clean power follows closely on the heels of a new multi-state initiative that launched last week called the 100 Percent Renewable Energy Collaboration. The new clean power effort includes California (the world’s fifth largest economy) and other U.S. states including New York.

Virus or not, the global economy will decarbonize

As for particular sectors, Morgan Stanley notes that much of the cost of transitioning to electric vehicles (EVs) has already been baked into the auto industry. Such a scenario shows that it is likely that manufactures will cut conventional vehicles out of the picture and focus on EVs as demand recovers.

The energy sector also supports the outlook for cleaner transportation. Though biofuels face challenges, the low cost of wind and solar will continue to drive the electricity market toward clean power while fossil fuel takes its lumps.

“Our analysts see downside risk to Big Oil dividends which could free up cash that could be redeployed as a growing renewables capex budget,” Morgan Stanley explained. “In addition, low oil prices provide an opportunity for governments to unwind fossil fuel subsidies, while economic stimulus is likely to be used to boost clean energy programs.”

Signs of trouble for ESG bonds…maybe not!

Another interesting development has taken place in the green bond area, where private capital (ideally) dovetails with public policy on sustainability.

On April 1, Morgan Stanley reported that March set a monthly record for investment grade (IG) bond issuance, attributing the activity to corporate efforts to keep the cash flowing.

On the downside, ESG bonds seemed to be left behind in the dust. In contrast to the frenetic pace of the bond market overall during March, ESG bond activity was just about the same as January and February.

However, Morgan Stanley attributed the relatively lackluster pace to the special nature of ESG bonds, which require more detailed investigation and reporting. In other words, the slow pace of activity in March was a feature, not a bug, of ESG investing.

Energy-related green bonds stand out, Keystone XL strikes out

Among the green bonds of particular interest in March, Morgan Stanley highlighted the global energy supplier E.ON. Based in Germany, E.ON issued a 750 million euro (US$815 million) green bond at the tail end of the month, which quickly oversubscribed. E.ON is a global leader in the clean energy transition, and the proceeds will be used for infrastructure and energy efficiency.

Morgan Stanley also took note of an oversubscribed bond issuance by Engie, another energy company pivoting to renewables.

Those two companies pose a striking contrast to TC Energy (formerly TransCanada). The firm received a sharp rebuke from Moody’s last week after word surfaced that it was restarting construction on its notorious Keystone XL tar sands oil pipeline.

All in all, more investors are beginning to bank on decarbonization, and the data indicates that COVID-19 could accelerate that trend. Fossil fuel stakeholders hoping for a role in the COVID-19 recovery will have to fight for any chance to push to the front of the line.

Image credit: Tim Trad/Unsplash