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Morgan Stanley’s asset management division has more than doubled the size of its Japanese portfolio over the past three years, aided by the increased appetite for funds strong on environmental, social and governance (ESG) factors.

The value of Japanese assets overseen by Morgan Stanley Investment Management rose to ¥6.6 trillion ($58 billion) in September, compared with about ¥3.1 trillion around the end of 2018, according to the division’s Japan head, Hiroyuki Shimizu. Holdings in ESG-related funds accounted for about a third of the increase, he said.

Japanese interest in ESG products has “clearly strengthened,” Shimizu said in an interview. “Not everyone is investing yet, and some are still studying them.”

It’s a global trend that pushed ESG assets worldwide above $35 trillion last year and is forecast to grow beyond $50 trillion by 2025, according to Bloomberg Intelligence. Cases of “greenwashing,” where environmental benefits are exaggerated or misrepresented, mean companies must stay cognizant of possible risks, Shimizu said.

Morgan Stanley Investment Management talks directly to the firms in which it invests — in addition to conducting research about them — to mitigate the greenwashing risk, he said.

“We are focusing on generating alpha, meaning that we should do everything to ensure we invest in good companies,” he said. “We confirm through engagement that companies are working on ESG in an appropriate manner.”

The Global ESG High Quality Growth Fund, an investment trust owned by Mizuho Financial Group Inc. and managed by Morgan Stanley, has particularly caught on with the Japanese. It has attracted $10 billion within a year and a half of its launch, becoming one of the largest of its kind in Asia. The vehicle initially drew regulatory scrutiny because of inadequate disclosure about social and environmental effects.

Overall ESG investments held by the Japanese reached $2.9 trillion in 2020, Global Sustainable Investment Alliance data showed. Strong investor demand prompted 51 ESG-related mutual funds to launch in Japan during the first eight months of this year, overwhelming the previous annual record, according to the country’s Financial Services Agency.

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