Morgan Stanley
  • Wealth Management
  • Nov 8, 2022

How to Build a Green Portfolio

You can seek to generate positive financial returns while benefiting the environment. Here are some different ways to approach that transition.

Emily Thomas Head of Investing with Impact, Wealth Management

Just as reducing your own carbon footprint may not be as easy or straightforward as you would like, building a green portfolio can take time and patience. There are a range of approaches you can take to generate potential positive financial returns while benefiting the environment.

The market for investments that help transition to a low carbon economy continues to gain momentum. This is helped in part by the continuing increase of renewables as a percentage of the global energy mix.  In fact, our own research team estimates that 40% of the global energy mix will be made up of renewable and alternative energy by 2030. Given this background, it’s important that to consider the different ways to build a green portfolio. To get started, here are a few decisions you need to make. 

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1.   What is your focus? Do you want to eliminate fossil fuels from your portfolio completely, invest in companies in any industry that have embraced positive environmental practices, or invest directly in firms that seek to find solutions or mitigate the effects of climate change—or all of the above? At Morgan Stanley we take a customized approach with clients to find the right fit for their portfolio and goals.

2.   Do you want to start with just a portion of your portfolio or convert the whole thing? For example, you could start by replacing a traditional fixed income mutual fund with a fossil fuel-free bond fund or a labelled “green bond” fund investing in renewable energy projects. If you’re ready to go all-in, we can help you devise a plan to align your entire portfolio with environmental goals.

3.   How will you implement these changes? It is often best to make changes to your existing portfolio over a period of time alongside an experienced Financial Advisor so together you can account for taxes, market fluctuations and your other investment goals. In general, decarbonization of your portfolio is a long-term investment philosophy, not something you can do in one quarter.

At Morgan Stanley, we take a client-driven approach to investing. The Investing with Impact platform, which launched in 2012, has more than $66 billion in client assets under management, and allows clients of all types, including individual investors with a few thousand dollars to invest as well as large institutional investors can leverage more than 230+ investment opportunities across asset classes or a suite of 12 portfolio solutions.

Incorporate Climate Action into your portfolio

Once you establish the elements of a green portfolio that closely align with your impact and financial goals, you can work with your Financial Advisor to incorporate Climate Action into your portfolio. One approach is through our  Impact Portfolio options starting at $10,000. This option seeks to generate broad-based positive environmental and social impact with an emphasis on Climate Action. You can also invest in a basket of stocks that address global sustainability themes, including climate change, in addition to health and wellbeing, waste management, water scarcity and safety and security. Finally, you can work with your Financial Advisor to construct a custom portfolio that leverages third-party funds to help achieve your unique climate goals.

The final step is measuring your progress. At Morgan Stanley, we leverage our patented1 impact reporting application – Morgan Stanley Impact Quotient® (Morgan Stanley IQ). With this application, clients can identify their climate goals and report on the portfolio’s alignment to these goals. If misalignment is identified, your Financial Advisor can use Morgan Stanley IQ® to adjust portfolio holdings to help improve alignment.

Diversification Matters

It’s a core investing principle at Morgan Stanley that portfolios should be diversified. One way to achieve that is to broaden your focus beyond just climate issues to encompass sustainable goals, which include environmental, social and corporate governance (ESG) criteria, which we believe are interrelated issues.

For example, an investment in affordable housing that is being renovated with solar panels can help the environment and achieve goals around social justice. 

Creating a green portfolio is not simple, but it can be rewarding. The most important step is the first one—deciding to take action. Climate change is a complex, global problem, but its effects can be mitigated and solutions achieved. An investment portfolio, no matter the size, can have a positive impact. Connect with a Morgan Stanley Financial Advisor to start building a portfolio that’s fit for you and your unique goals. 

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Important Disclosures:

This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be appropriate for all investors. Morgan Stanley Smith Barney LLC recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This material is not an offer to buy or sell any security, or to participate in any trading strategy. Asset allocation and diversification do not guarantee a profit or protect against a loss. Past performance is no guarantee of future results.

Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Individuals are urged to consult their personal tax or legal advisors to understand the tax and legal consequences of any actions, including any implementation of any strategies or investments described herein.

Investing in the market entails the risk of market volatility. The value of all types of investments may increase or decrease over varying time periods.  Fixed Income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall.

The returns on a portfolio consisting primarily of sustainable or impact investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because sustainability and impact criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.  Please note that there is currently no standard definition of green bond. Without limiting any of the statements contained herein, Morgan Stanley makes no representation or warranty as to whether any particular bond constitutes a green bond or conforms to investor expectations or objectives for investing in green bonds. For information on characteristics of these bond, use of proceeds, a description of applicable project(s), and/or any other relevant information about the bond, please reference the offering documents for the bond.

Investors should carefully consider the investment objectives, risks, charges and expenses of a mutual fund before investing. The prospectus contains this and other information about the mutual fund. To obtain a prospectus, contact your Financial Advisor or visit the mutual fund company’s website. Please read the prospectus carefully before investing.

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