The profound demographic changes underway in countries around the world will require innovative, socially focused solutions in sectors including health care, finance and infrastructure.

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Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Bryd, Morgan Stanley's Global Head of Sustainability Research.

Mike Canfield: And I'm Mike Camfield, Head of EMEA Sustainability Research.

Stephen Byrd: On this special episode of the podcast, we'll discuss the social factors within the environmental, social and governance framework, or ESG, as a source of compelling opportunities for investors. It's Tuesday, August 8th, at 10 a.m. in New York.

Mike Canfield: And 3 p.m. in London.

Stephen Byrd: At Morgan Stanley Research. We believe that investing in social impact is critical to addressing some of the most pressing challenges facing our world today, such as inequality, poverty, lack of access to health care and education, and the repercussions of climate change. Traditional methods like philanthropy and government aid are a piece of the puzzle, but alone they can't address with the breadth and scale of these issues. So, Mike, looking back over the last couple of decades, investors have sometimes struggled with the social component of ESG investing. Some of the main challenges have been around data availability, the potential for social washing and the capacity to influence systemic change. How are market views on social investing changing right now, and what's driving this shift?

Mike Canfield: It has historically been quite easy for investors to dismiss social, it's too subjective, too hard to measure, overly qualitative, and perhaps not even material in moving share prices. Increasingly, we do find investors recognize the vast and intractable social problems we face, whether that's structural shifts in workforces with countries like Korea, Japan and large parts of Europe projecting working age population decline by double digit percentage in the next 15 to 20 years, significant growth in urbanization or growing middle class populations in countries around the world. Investors also increasingly understand the interconnectivity of stakeholders across society, be that supranational organizations or governments or the corporate world, or even citizens themselves. Concurrently, it's becoming clear that corporate purpose and culture are critical considerations for prospective and current employees, as well as end customers themselves who are prepared to vote with both their wallets and their feet. All that said, we do note the overall impact at EM has garnered in 18% kagger over the last five years to nearly $213 billion with the Global Impact Investing Network pointing out that over 60% of impact investors are targeting some of the UN's socially focused SDGs. Notably goal eight around decent growth, goal five, around gender equality, goal ten around reduced inequalities broadly and goal three good health and well-being. In terms of drivers, we're seeing the realization rapidly dawning amongst investors that the profound changes underway in society and the climate will drive the need for innovative, socially focused solutions in a number of sectors, from health care to finance to infrastructure, as well as significant challenges to resilience and adaptation for industries around the world. With huge shifts in demographics coming whether through urbanization or migration, aging populations in some countries or declining fertility rates, the investing landscape is set to change dramatically across sectors, with change manifesting in anything from shifting consumer preferences to education access and outcomes to greater need for assistive technologies, to substantial food production issues, to financial system access and inclusion, or even simply addressing rapidly increasing demand for basic services and clean energy.

Stephen Byrd: Thanks, Mike. So what are some of the core themes in social investing?

Mike Canfield: Yeah in our recent social skills notes, we did identify five truly global, fast growing and compelling investment themes you can focus on under the broad umbrella of what we would call social investing. Firstly, access to health care, which includes but obviously not limited to pharmaceuticals, vaccines, orthopedics, medical devices, elderly care, sanitation and hygiene, women's health and sexual health. Secondly, nutrition and fitness, which encompasses things like infant nutrition, healthy or healthier food and beverage options, alternative proteins, food safety and food packaging. Thirdly, social infrastructure, which includes mobility, digital and communication systems, connectivity, health care and education facilities, community and affordable housing and access to clean energy. Fourthly, education and reskilling, which includes everything from pre-K, K-12, higher education, corporate and lifelong learning. Our colleague Brenda recently wrote on the potential $8 trillion opportunity in these markets. And finally, right inclusive finance, which encompasses microfinance, financial infrastructure, mobile digital banking, banking for underserved communities, fintech solutions and provision of financial services to SMEs. So Stephen, do you think any industries or regions stand out as leaders or laggards perhaps when it comes to social investing?

Stephen Byrd: You know, Mike, when I think about industries leading, I do think education really stands out. And I think we all recognize that education is really one of the pillars of a productive, well-functioning society, but it does face an array of challenges. A quality education can promote democracy, help communities elevate their social and economic status, and drive innovation in the economy, and yet, over the past few years, multiple issues in education, which were really exacerbated by the COVID 19 pandemic, have hampered equitable progress in society across markets, regions and communities. In our note this past May on education innovators, we really focus on these issues as fields of opportunity for investment in innovation. An example would be improving the quality of the learning experience. The pandemic was an especially disruptive period for K-12 education, leaving a learning deficit that could linger for an entire generation, especially for groups that were already disadvantaged. The pandemic also highlighted the need for more robust lifelong learning opportunities beyond the traditional classroom. We expect to see players that are able to service these needs, best meet market demand. And Mike, in terms of reasons that stand out. A key issue that you highlighted before is data availability. And I would note that really Europe has led the way in terms of best in class disclosure. So Mike, social considerations have historically been viewed as overly qualitative rather than quantitative, but our research has shown a variety of ways in which the S-pillar can closely link to company fundamentals. Could you walk through some of these?

Mike Canfield: Yeah, absolutely, Stephen, I think the starting point for our research was this notion that you can both do good and do well. The values in value based investing can be combined to deliver alpha and positive social impact at the same time. So one of the ways we think to approach this is to assess the corporate culture and its that that forms the first pillar of our forces social investing framework. At its heart, company culture pertains to the shared values, attitudes, practices and standards that shape a work environment and the strategy for business. In our analysis, we want to establish a holistic view of why a company exists, what it's doing to contribute positively towards society, how it's managed, and where its most material social related opportunities and risks lie. In doing that, we've established a data driven, objective process to evaluate culture using eight core components across five performance linked indicators, which are Glassdoor ratings, shareholder voting against management or proprietary, her school employee turnover and board gender diversity. And three engagement focus indicators. The trend in employee diversity, whether the company has a supplier code of conduct in place, and violations of the UN's Global Compact. These data sets are readily available and repeatable, giving a clear view of companies relationship with both its internal and its external stakeholders. Steven, How do you think investors can think about social investing more systematically, can you elaborate a little more on the 4 C's framework?

Stephen Byrd: Yeah happy to Mike, I think you really touched on culture in a very comprehensive way. I really do think it's important that the performance related KPIs that you laid out really do show very clear performance differential between top and bottom quartiles. I want to move on to the second of the C's. This is Cultivate. And here we really focus on three so-called AIM lenses. The first is additionality. This is really the notion of generating positive social outcomes or impacts that otherwise would not have materialized. So finally, Mike, how does A.I play into social investing?

Mike Canfield: Everyone's favorite acronym at the moment, clearly something that we can't ignore. We do believe there's a very real potential for us to be at the start of another economic revolution, driven by rapid technological evolution in AI. The so-called third industrial revolution, otherwise known as the digital revolution, brought with it transformational technologies in cell phones and the Internet, increased interconnectivity, greater industrial productivity and vastly greater accessibility of information. AI looks to play a central role in the fourth Industrial Revolution. Klaus Schwab, founder of the World Economic Forum, popularized that term back in 2015 when he suggested that AI and advanced robotics could herald a substantial shift in industrial capitalism and the so-called knowledge economy. This evolution could fundamentally change employment and geopolitical landscapes. Just as in the early 19th century, when Luddites found machines left weaving skills obsolete. AI could well prove just as disruptive, but technology on a grander scale, across everything from manufacturing to search engines to media content creation. We do see significant AI opportunities in areas like drug development, in education outcomes and access and significant benefits across efficiencies and resource management, whether that's in power grid optimization or in weather prediction, for example. We do suggest a three pronged approach to evaluating AI driven opportunities which focus on areas including reducing harm to the environment, enhancing people's lives through biotech, cybersecurity and life sciences, for example, and enabling technological advancements. Simultaneously, given a relative lack of regulation for the industry at the moment, we do think consistent investor engagement is key to driving responsible A.I practices.

Stephen Byrd: Mike, thanks for taking the time to talk.

Mike Canfield: Great to speak to you, Stephen.

Stephen Byrd: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts, and share the podcast with a friend or colleague today.

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