Morgan Stanley’s PLUS tied to MSCI KLD 400 Social index designed for sustainable investors

By Emma Trincal

New York, May 8 – Morgan Stanley Finance LLC’s 0% buffered Performance Leveraged Upside Securities due Dec. 3, 2021 linked to the MSCI KLD 400 Social index target investors who seek exposure to the stocks of companies that meet social values, screening out “controversial” activities or products.

An old new thing

While the index is nearly three decades old, it has only been used three times in registered U.S. structured notes, according to data compiled by Prospect News.

The index is a price-return index with the goal of tracking the price performance of companies that exhibit positive environmental, social and governance (ESG) characteristics, according to a 424B2 filing with the Securities and Exchange Commission.

It excludes the stocks of gambling and adult entertainment companies as well as companies that produce alcohol, tobacco, weapons, nuclear power or genetically modified organisms.

Previously maintained by research firm KLD Research & Analytics, the MSCI KLD 400 Social index is one of the first Socially Responsible Investing (SRI) indexes, according to index provider MSCI’s website. It was launched in 1990 and previously known as Domini 400 Social index.

Not much done

Two “KLD 400 Social” offerings came out in in June 2007 in the form of a pair of JPMorgan Chase & Co. autocallable issues sized at $2.5 million each.

The only other issue was priced last month by Morgan Stanley with $1.6 million of 15-month leveraged notes paying 300% on the upside up to a 12.25% cap with full exposure to downside risk.

Overall, less than $7 million in just three registered deals have been issued on this index in the past 15 years.

Hedging 2020

“It’s Morgan Stanley who wants to send the message that they’re socially responsible. It will be interesting to see how much they price it for,” said an industry source.

“In today’s political environment, I get it, there are probably people out there who want to play the elections. You have to hedge your bet that way too.

“In defense of those deals though, there is a case to be made for impact investing whether it’s the environment or corporate governance.

“They probably did it in response to an inquiry.”

Morgan Stanley’s announced deal will pay two-times the gain up to a 17.25% maximum return. A 10% buffer will protect part of the principal amount.

“It’s actually not a bad structure for a short-term deal,” he said.

Follow big money

Meeting certain social responsibilities has become a growing focus for asset managers in an effort to buy the stocks of companies that meet their social and environmental standards.

“I’m hearing more and more institutional investors, some foundations and private banks that are increasingly getting demand for these kinds of products,” said Ferenc Sanderson, principal at Elizabeth Park Capital Management, a hedge fund manager.

“A lot of foundations in the U.S. have a social mission whether it’s a church, a hospital or a charitable organization. It might just be one of the factors they have to consider. So, they do.

“Also, some studies suggest that those investments might outperform.”

The MSCI KLD 400 Social index gained 13.7% over the past year compared to 6.75% for the S&P 500 index.

While socially responsible investing is not yet a big story in a retail-oriented structured products market, he said he expects those products to become more mainstream.

“It wouldn’t surprise me to see more. It’s already a mature trend in Europe, where it started. But it’s definitely growing in the U.S,” he said.

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes will price May 31.

The Cusip number is 61768Y364.

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