Morgan Stanley IM: Engage Autumn 2024

In this edition:

Accounting for all costs
Our decade-long engagement on pay with a German multinational software company we hold in our global and international portfolios concluded satisfactorily with the company’s decision to include share-based compensation (SBC) in its earnings. In this piece, we look at the increasing prevalence of SBC in employee compensation and why excessive use of it can be problematic.

The importance of accuracy
The reporting of inaccurate data can pose a potentially financially material risk to credit rating companies, including litigation and reputational risks, as these companies play a key role in helping creditors make decisions about granting individuals loans. In this engagement, we met with one of the credit rating companies we hold to discuss accuracy in credit reporting.

Seeing the wood for the trees: EUDR 101
With potential fines for companies of up to 4% of total European Union (EU) turnover, the EU Deforestation Regulation (EUDR) has the potential to pose financially material risks to companies doing business in the EU. In order to understand the risk facing companies in our portfolios, we set out to assess the exposure of companies we own and engage directly with those we consider to be at potential risk. In our engagements, we focused our discussion on the visibility and transparency of companies’ supply chains today, as well as any planned changes to meet the new rules.

^{Risk Considerations}

^{There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy’s assets were invested in a wider variety of companies. In general, equity securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small- and mid-capitalisation companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. ESG strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.}