Outlook: Three trends shaping the next decade of sustainable investing
Morgan Stanley’s Institute for Sustainable Investing11/22/23
Summary: New investment strategies, demand for resources and more stringent regulations are shaping the next decade of sustainable investing.
The urgency for even more capital to finance innovative sustainability solutions is clear, as companies race toward a net-zero energy transition and demand grows to finance issues like ocean conservation important to global economies.
In the coming decade, investors and companies will need to tackle the complex terrain of sustainable finance to seize emerging investing opportunities. Morgan Stanley’s Institute for Sustainable Investing highlights three of these trends:
- The growing diversity of sustainable investing products and strategies.
- A surging demand for land, minerals, and new technologies to facilitate the net-zero transition.
- An increase in global government regulations that will affect corporate playbooks, disclosures, and data.
The diversity of sustainable investing strategies is set to broaden.
Demand from Millennial investors—paired with new government incentives and regulations—will likely fuel the presence of sustainable investing in new asset classes and themes in the next 10 years, according to Morgan Stanley. A large majority of US Millennials (99%) indicated they were interested in sustainable investing, according to a 2021 report from the Institute. 1
At the same time, sustainable investment opportunities are likely to branch out from public markets to other areas such as private equity. Private equity investors may seek growth opportunities with sustainable brands, which 62% of younger generations in the US say they prefer to buy from,2 as companies may seek efficiencies in energy, inputs and materials, as well as potential acquisitions of sustainability-oriented companies.
Finally, Morgan Stanley expects growing interest in themes beyond climate action. These include:
- nature and biodiversity,
- transition finance (which funds companies’ transition to net-zero) and
- inclusive finance (which offers financing to underrepresented people and communities).
Social issues should also continue to gain prominence on agendas, with growing attention to issues such as:
The net-zero transition will require a change in approaches to land use.
The race is on to decarbonize and reach key 2030 interim targets. Companies will need to reorient business models and corporate practices, while long-term investors will need to decide how to put their capital to work to meet global climate targets.
- One area of focus will be ensuring productive and efficient land use with growing demand for renewable energy and conservation efforts. Hydropower and some types of solar power can require up to twice as much land needed for coal, and up to 30 times as much as gas. The amount of land used for electricity production globally could increase by 60%.3 As competition for land grows, companies in all industries will need to ensure they use it sustainably. To ensure long-term climate-positive outcomes, land use should include reforestation and afforestation, which involves planting trees on land not previously forested; landscape restoration; and biodiversity protection.
- Meanwhile, demand for metals and minerals such as copper, lithium, nickel, cobalt, graphite, zinc, and rare earth metals is set to increase. As the demand for renewable energy is expanding, so is the production of electric vehicles and the typical electric vehicle requires nearly six times more mineral inputs than a conventional vehicle. Estimates suggest that demand for these minerals could rise between two- to six-fold by 2040,4 generating a battle for access to limited sources of these key commodities. The rapid growth in demand could lead to a shortage of key minerals and metals unless companies increase investments in mining exploration and outputs. The Energy Transitions Commission estimates that companies would need to invest $70 billion per year through 2030 to expand supply, yet annual capital investments have averaged only $45 billion in the last two decades.5 Additionally, it will be important to ensure that these resources are mined sustainably, with appropriate environmental and social standards to limit the negative impact on the physical environment and local communities.
Companies will need to reorient business models and corporate practices, while long-term investors will need to decide how to put their capital to work to meet global climate targets.
ESG regulation will have far-reaching impacts for corporates and investors.
Companies should expect to navigate an increasingly complex web of regulations and policy directives aimed at driving the transition to a net-zero global economy. One that is already slated to start in 2024 is the EU’s Corporate Sustainability Reporting Directive, which will require more than 50,000 companies globally to disclose numerous ESG factors.6 Regulations will reshape the corporate playbook, ensuring sustainability is a fundamental component of business strategy, operating models, and financing plans.
For investors, more robust corporate ESG disclosures means that specific and standardized information will be in the public domain to use when evaluating a company’s sustainability performance, including revenues, corporate practices, and supply chains. ESG data will likely also improve significantly as modeling techniques using artificial intelligence are applied to the space.
This evolution will likely require more sustainability-focused finance professionals at companies and in the investing community. Demand for sustainability skills in finance has soared, with a remarkable 17% increase in hires between 2021 and 2022 in the US and EU.7 But there remains a critical talent gap, and in some cases, companies are already starting to pay talent premiums for people with ESG and sustainability skills.
Looking to a sustainable future
Though companies and investors understand that making the global economy more sustainable and inclusive will be a priority in the next 10 years, it will not be an easy road. Stakeholders will need to collaborate to find ways to finance the transition in a manner that considers the complex interdependencies of many key environmental and social issues.
The source of this article, Trends for the Next Decade of Sustainable Investing, was originally published on October 13, 2023.
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What to read next...
1 Navigating the Next Decade: 10 Demand Signals for the Next 10 Years of Sustainable Finance, 2023.
2 Morgan Stanley, https://www.morganstanley.com/im/en-us/individual-investor/insights/articles/push-and-pull-factors-drive-the-evolution-of-sustainable-investing-in-private-markets.html, January 26, 2023.
3 Assumptions based on taking one International Energy Agency (IEA) scenario as an illustration alongside broad assumptions on land use by energy type.
4 IEA, https://www.iea.org/reports/the-role-of-critical-minerals-in-clean-energy-transitions/executive-summary, March 2022.
5 Energy Transitions Commission, https://www.energy-transitions.org/new-report-scale-up-of-critical-materials-and-resources-required-for-energy-transition/, July 20, 2023.
6 Refinitiv, https://www.refinitiv.com/perspectives/regulation-risk-compliance/how-many-non-eu-companies-are-required-to-report-under-eu-sustainability-rules/, June 2, 2023.
7 Linkedin, https://economicgraph.linkedin.com/content/dam/me/economicgraph/en-us/global-green-skills-report/green-skills-report-2023.pdf, 2023.