Four ways investors can act on climate change

As scientists warn about a shifting climate, more investors are thinking about environmental risks and how they might affect their portfolios. After all, global sea levels have risen  eight to nine inches since 1880,¹ a process that is rapidly accelerating² and threatening major global cities like Jakarta, Lagos, and Miami.³

But it’s not necessarily all doom and gloom. Investors have an opportunity to play a role in bringing about change, and that can include managing for factors related to transitioning to a low carbon economy.

Here are four significant business risks associated with climate change and some ideas for how to help mitigate them through investments.

Developing countries may offer investment opportunities in new construction and infrastructure projects that are built to hold up under extreme weather events. In the US, investments can include companies that help refit existing buildings and reinforce energy infrastructure for more resilience.

For investors, the opportunities are twofold: energy conservation within existing infrastructure in developed economies, and integration of resource efficiency in new commercial construction in emerging markets.

As economies around the world transition to lower carbon economies, investors could benefit from reducing their exposure to traditional energy sectors, investing in funds and companies that are positioning themselves for this transition, or focusing on specific themes such as renewable energy, biofuels, and green hydrogen, or innovative technologies such as electric vehicles and carbon capture and storage.

Consider these facts: Renewable energy sources are now cost-competitive in many markets. The cost of utility-scale solar energy decreased 85% from 2010 to 2020⁴ and renewables are set to account for almost 95% of the increase in global power capacity through 2026.⁵

One approach is to invest multiple sectors of the economy—including traditional energy—but only in companies that have industry leading environmental, social, and governance (ESG) practices. That might mean investing in companies with sound corporate climate policies in place, or those that disclose their carbon footprints as well as disclose reduction targets over time. With regard to the environment, a number of companies have made sustainability pledges, such as achieving carbon neutrality by a certain date, relying more on alternative energy, or cutting usage through efficiency.

This also can include companies with better safety records and more diverse boards. By investing in companies from a best-in-class environmental, social, and governance perspective, investors may be able to eliminate the worst offenders and position their portfolio in leading sustainable corporate practices across various industries.

In the US, heat waves and drought greatly affect agricultural production, including corn, wheat, soy, and cotton. Without adaptation, estimates show that agricultural profits for common crops could fall 30% by 2070, thanks to climate change.⁶  

For those looking to bring a sustainable approach to their investing strategy, there’s more than one way to go about it. In addition to exploring individual companies that may be pushing the pace on the opportunities listed above, investors could also look to sustainable funds or thematic investing. There are plenty of mutual funds and ETFs that reflect ESG and socially responsible investing (SRI) principles, as well as investing themes that highlight specific economic and environmental trends, from innovative vehicles to clean energy and water.

It’s not just for the equity side of a portfolio either. Investors can explore bonds of companies with sound environmental policies or explore “green bonds”, whose proceeds have a stated purpose that will seek to promote climate mitigation activities or other environmental sustainability projects. The opportunity in green bonds is vast, with issuance exceeding $550 billion in 2021 alone.⁷

The most important thing, ultimately, may be realizing there is potential for action. Climate change poses a complex, systemic global challenge, but its risks can be mitigated and an investment portfolio, no matter the size, can play a role.

The source of this Morgan Stanley article, Four Ways Investors Can Act on Climate Change, was published on  March 30, 2022.

1. https://www.climate.gov/news-features/understanding-climate/climate-change-global-sea-level#:~:text=Global%20mean%20sea%20level%20has,of%20seawater%20as%20it%20warms
2. https://oceanservice.noaa.gov/facts/sealevel.html
3. https://www.newsweek.com/these-five-cities-are-vulnerable-rising-seas-including-miami-new-york-1486575
4. https://www.irena.org/publications/2021/Jun/Renewable-Power-Costs-in-2020
5. https://www.iea.org/news/renewable-electricity-growth-is-accelerating-faster-than-ever-worldwide-supporting-the-emergence-of-the-new-global-energy-economy
6. https://www.nature.com/articles/s41467-020-18725-w
7. Morgan Stanley Research, “ESG Bond Intel: 2021 Issuance Surpasses $1T,” 12/7/21