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Morgan Stanley Report: Value Creation Drives Corporate Sustainability, Despite High Investment Costs

Morgan Stanley Report: Value Creation Drives Corporate Sustainability, Despite High Investment Costs

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Companies’ top reason for pursuing a sustainability strategy is the opportunity for value creation. The biggest hurdle? The high level of investment that’s needed.

The potential for creating value is the top reason corporations pursue sustainability, according to “Sustainable Signals: Understanding Corporates’ Sustainability Priorities and Challenges,” a new Morgan Stanley Institute for Sustainable Investing report. Regulatory compliance and a company’s moral responsibilities round out the top three motivations for adopting a sustainability strategy.

The findings come from a survey conducted earlier this year of more than 300 companies, with the responses provided by those with decision making responsibility on sustainability matters within their organizations. The sample includes private and public companies with more than $100 million in revenue, across a broad range of industries and split equally among North America, Europe and Asia.

Sustainability as a Value Creation Opportunity

When asked how sustainability impacts long-term corporate strategy, 85% say it is primarily (53%) or partly (32%) a value creation opportunity. Value creation is also the top reason that companies are pursuing their sustainability strategy, with half rating it a very significant reason. 

Source: Morgan Stanley Institute for Sustainable Investing, May 2024

Indeed, there are other indications in the data to suggest survey participants see sustainability efforts as supporting business objectives, as respondents gave less weight to motivations that are decoupled from business opportunities and more aligned to outside pressures. Just 26% cited pressure from NGOs, activists and media, pushing that response to the bottom of the list.

Sustainability strategies and core business strategies are converging,” says Jessica Alsford, Chief Sustainability Officer at Morgan Stanley. “Companies increasingly see sustainability factors as integral to the company’s long-term value creation.

Access to Capital Is Key

Companies see the high level of required investment as the biggest barrier to implementing their sustainability strategies. Asked to assess a range of obstacles, 70% of respondents say required investment is either a very significant or somewhat significant hurdle. In fact, investment needs ranked 1.5 times higher as a very significant barrier, at 31%, than issues such as lack of corporate leadership (19%) or employee skills (19%). Other important barriers include conflicts with the financial goals of the company or the business model (28%/24% respectively), and macroeconomic uncertainty (25%).

If the high level of investment is a concern, it follows that access to capital is vital, and 84% of respondents say support from investors is important for the companies to deliver on their sustainability strategies. Notably, 76% say that sustainability measures could drive a lower cost of capital (equity and/or debt) over the next five years. One-third of respondents (34%) say there is room for improvement in their efforts to align corporate financing with their sustainability strategy via labeled instruments such as green bonds, while only 42% say they are meeting or exceeding expectations in this area, the lowest rate among all sustainability activities asked of respondents.

Sustainability as an investment theme continues to evolve towards more nuance and rigor as investors must confront competing priorities – such as climate and the social costs of high energy prices – and focus on “real” impact,” states Melissa James, Head of the Global Capital Markets ESG Center of Excellence. “As a consequence, companies continue to engage on the topic of accessing capital to finance their sustainability goals and initiatives. As we approach deadlines for various climate commitments from corporates and investors, there will be a continued push for financing clean tech and facilitating the energy transition, resulting in a natural maturation of the market.

Source: Morgan Stanley Institute for Sustainable Investing, May 2024

Climate Change Impacts Business Today

Asked about risks to their companies’ business models, 23% of respondents say there is already an impact from climate change. That puts climate on par with more traditional business risks such as supply chain instability and geopolitical conflict (both 23%), and just below the risks with the biggest current impact, which were technological change and the action of competitors (both 25%).

When respondents considered medium and long-term risks in addition to short-term risks, 92% expect climate change to impact the business model by 2050. 

Source: Morgan Stanley Institute for Sustainable Investing, May 2024

Sustainability and Decision Making

There are signs that sustainability is becoming more integrated with all important functions within a company. A majority of respondents (55%) say sustainability criteria come into play in key business decisions, including capital expenditures, research and development, new products and mergers and acquisitions.

Clearly sustainability is reaching the board room, though there may be more expertise needed among directors. While 40% of survey respondents say there is board-level responsibility for sustainability, just 37% report that the board has sustainability expertise. Key areas where respondents think directors could benefit from greater knowledge include sustainability regulations (57%) and sustainability labeled financing instruments (43%).

Related Article: Morgan Stanley Acquires Energy Efficiency Solutions Provider Resource Innovations

As a whole, these survey results show sustainability becoming a routine business consideration. “There may yet be challenges in developing expertise and financing models, but corporate leaders view sustainable business practices as fueling the creation of value as well as the mitigation of risk,” says Alsford. 

Source: Morgan Stanley Institute for Sustainable Investing, May 2024


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