Move over 'FAANG,' the next decade of investing will be defined by 'ESG,' says Morgan Stanley

Published Thu, Aug 20 202012:05 PM EDT

(This story is for CNBC PRO subscribers only.) If FAANG dominated the market during the 2010s, Morgan Stanley believes ESG will be the defining acronym over the next decade. The firm said Wednesday that the acronym, short for environmental, social and corporate governance, is "likely to dominate financial markets during the 2020s" due to societal trends driving change across consumer, corporate and investor behavior. Far from just a marker of "good" or "bad," Morgan Stanley said ESG-focused metrics are essential to understanding a company's growth potential as well as possible risks, among other things. This is especially true in the wake of the coronavirus pandemic, which the firm said could act as a turning point of sorts for ESG investing. Looking forward, Morgan Stanley said that companies' messaging around ESG issues will become increasingly important. "The Covid-19 crisis has brought social and governance elements to the fore, and these have gained a lot of traction with investors," the firm said in a note to clients. "In particular, there has been an added focus on how companies treat their employees, suppliers, customers and society as a whole, as investors incorporate the treatment of stakeholders into their investment process." ESG investing was once considered a bull market phenomenon, but during the coronavirus-induced market rout sustainability-focused funds attracted record inflows, while nearly two-thirds outperformed their conventional index-fund counterparts, according to data from Morningstar. Additionally, after net inflows of $71.1 billion in the second quarter, global assets under management in ESG-focused funds topped $1 trillion for the first time, Morningstar said. One of the challenges that has historically faced ESG investing — and something often cited by critics — is the lack of strict definition for what "ESG" means, as well as the myriad of approaches that ESG funds can take. Because of this, and due to different ESG-related risks for different sectors of the economy, Morgan Stanley said it's up to each company to address how it's factoring sustainability into its long-term business plan. Corporations should make relevant data easily accessible, while also incorporating ESG factors into longer-term narratives. "Companies that stand out as leaders will typically incorporate their sustainability narrative in the core message from the C-suite ... Sustainability information should not be siloed," Morgan Stanley said. As millennials become a larger portion of the market, companies that don't take this approach could lose out. According to a recent survey conducted by Morgan Stanley's Institute for Sustainable Investing, nearly 95% of millennials are interested in sustainable investing, while 75% believe that their investment decisions could impact climate change policy. Baby boomers are on track to pass down $30 trillion in wealth in the coming decades, meaning ESG criteria will likely continue to grow in importance. "Longer term, we think this focus on stakeholder management, in particular through the Covid-19 pandemic, could have an impact on company profitability and share price performance," the firm summarized. - CNBC's Michael Bloom contributed reporting.

(This story is for CNBC PRO subscribers only.)

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If FAANG dominated the market during the 2010s, Morgan Stanley believes ESG will be the defining acronym over the next decade.

The firm said Wednesday that the acronym, short for environmental, social and corporate governance, is "likely to dominate financial markets during the 2020s" due to societal trends driving change across consumer, corporate and investor behavior. Far from just a marker of "good" or "bad," Morgan Stanley said ESG-focused metrics are essential to understanding a company's growth potential as well as possible risks, among other things.