How to tackle climate change in your portfolio
Morgan Stanley Wealth Management
01/11/23Summary: As the world increasingly transitions to a low-carbon economy, explore how you can pursue your climate action goals alongside your financial objectives.
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Many investors are seeking new ways to meet both their climate goals and financial objectives. According to the Morgan Stanley Institute for Sustainable Investing, 85% of the general population and 95% of Millennial investors are interested in sustainable investing—with climate issues a top priority for many of them.
Investors can explore ways to advance climate solutions and align their investments with the low-carbon transition using a range of products, including mutual funds, exchange-traded funds (ETFs), and professionally managed accounts.
Still, a couple key questions may be top of mind for those looking to make a positive environmental impact with their money:
Aren’t governments primarily driving efforts to reduce carbon emissions?
Governments play a key role, but it will take both public- and private-sector commitments to reduce carbon emissions at the scale necessary. Corporations continue to make major commitments to reduce carbon emissions and aid the transition to a low-carbon economy across all industry sectors. According to the nonprofit Science Based Targets, more than 1,900 companies globally have committed to reducing their carbon footprint.1
Are climate-solution investments only focused on renewable energy?
Companies are increasingly focused on reducing their energy-related emissions across their operations and supply chains. For example, more than 350 of the world’s most influential companies have committed to sourcing 100% of their global energy needs from renewable sources.2 That said, rebuilding global energy systems, infrastructure, and technology to support the low-carbon transition presents multiple climate investment opportunities outside of just renewable energy. These include electric vehicles, smart grids, energy storage, green hydrogen, and carbon capture, to name a few.
Climate action investment approaches
Investors seeking to mitigate climate change-related risks and identify opportunities that aid in the transition to a low-carbon economy have a variety of ways to develop a climate action investing strategy:
- Restriction screening, which involves reducing or seeking to eliminate exposure to companies tied to coal, oil, gas, and other high greenhouse-gas-emitting energy sources and activities to mitigate risks associated with these investments as the world shifts toward cleaner energy sources.
- ESG integration, which involves incorporating environmental criteria into the investment selection process. Climate considerations to potentially integrate alongside financial metrics in order to identify environmental leaders include a company’s carbon footprint, use of natural resources, and the amount of revenue derived from products or services that provide climate solutions. This approach can also help investors mitigate climate change-related risks and evaluate them as part of buy and sell decisions.
- Investing in decarbonization technologies and solutions that mitigate the effects of climate change and aid in the transition to low-carbon economy in order to position for potential opportunities.
The source of this article, How to Tackle Climate Change in Your Portfolio, was published on December 7, 2022.
- Science Based Targets, “Companies taking action,” November 2022. https://sciencebasedtargets.org/companies-taking-action/
- The RE100, RE100 Members, https://www.there100.org/re100-members