Morgan Stanley has picked an interesting moment to press ahead with expanding its offering of ESG-themed funds.
Earlier this month, the New York-based investment bank introduced six ESG products. The equity and fixed-income exchange-traded funds are managed by Calvert Research and Management, a leader in environmental, social and governance investing that Morgan Stanley acquired in 2021 as part of its purchase of Eaton Vance Corp.
Morgan Stanley’s decision is particularly notable given the increasing pushback against ESG by Republican politicians, including some potential presidential aspirants, and their fossil-fuel industry donors.
John Streur, Calvert’s chairman, accepts that the political environment is fraught. But he said “we’re feeling pretty good” about demand for the new products. The firm had net fund inflows last year, even as stock and bond markets recorded their worst year since the financial crisis of 2008.
“ESG is all we do and we believe we have a better investment strategy than anyone else in the marketplace,” Streur said.
And ESG isn’t going away, Streur said. In fact, more companies are focused on reducing their exposure to financially material environmental, workplace and corporate governance risks than ever before, he explained.
“It’s not the greatest timing for ESG,” said Eric Balchunas, an ETF analyst at Bloomberg Intelligence. “Flows have flat-lined with energy prices up and the anti-ESG backlash gaining momentum.”
But trying to time the market is futile, said Anthony Rochte, Morgan Stanley’s global head of ETFs. Decisions like these are made looking five to 10 years down the line, he explained.
Rochte said the launch of the Calvert ETFs will be followed by offerings from some of Morgan Stanley’s other non-ESG investment brands, including Eaton Vance.
Morgan Stanley has allocated $20 million of seed capital to each of the six Calvert funds, and there’s also a group of outside investors that backed the launch, Rochte said. He declined to identify them.
To put Morgan Stanley’s investment in perspective, ESG-labeled ETFs in the US attracted a net $2.9 billion in total last year, down from a record $36 billion in 2021, data compiled by Bloomberg show.
Balchunas contends the Calvert funds may struggle to win investors in the short term, even with all of Morgan Stanley’s marketing muscle behind them. “It’s a tough environment,” he said.
Nevertheless, Balchunas added that Calvert has been “the least worst in terms” of investment flows among all of Morgan Stanley’s brands during the past year, and that ESG metrics are here to stay despite the issue’s politicization from the right.
The new products are the Calvert International Responsible Index ETF (ticker CVIE), the Calvert US Large-Cap Core Responsible Index ETF (CVLC), the Calvert US Large-Cap Diversity, Equity and Inclusion Index ETF (CDEI), the Calvert US Mid-Cap Core Responsible Index ETF (CVMC), the Calvert US Select Equity ETF (CVSE), and the Calvert Ultra-Short Investment Grade ETF (CVSB).
The way in which Morgan Stanley is pricing these funds gives them a better chance of succeeding, Balchunas said. The passive products—CVIE, CVLC, CDEI and CVMC—carry expense ratios of 20 basis points or cheaper, while its active ETFs—CVSE and CVSB—will charge below 30 basis points.
“These funds are legitimately low-cost,” he said. “They’ll likely attract some assets over time.”
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