Morgan Stanley
  • Wealth Management
  • Apr 19, 2024

How to Tackle Climate Change in Your Portfolio

As the world increasingly transitions to a low-carbon economy, explore how you can pursue your climate action goals alongside your financial objectives.

Many investors are seeking new ways to meet both their climate action goals and financial return objectives. According to the Morgan Stanley Institute for Sustainable Investing, 84% of the general population and 96% of Millennial investors are interested in sustainable investing—with climate issues a top priority for many of them.

A changing climate and the transition to a low-carbon economy are presenting material investment risks and opportunities. As supportive climate policies emerge on a global scale and the private sector increasingly introduces ambitious climate commitments, it is clear that capital will have a pivotal role to play. 

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Investors can explore ways to advance climate solutions and align their capital with the low-carbon transition using a range of products, including mutual funds, exchange-traded funds (ETFs) and separately 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 Rocky Mountain Institute (RMI), nearly 8,000 companies, representing more than a third of the global economy by market capitalization, have either committed to science-based targets or had such targets independently verified through the U.N.-backed Science Based Targets Initiative (SBTi).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 chain. Corporations around the world agreed to buy more renewable energy in 2023 than they did the year before, with more than 450 companies committing to purchase a record 46 gigawatts, a 13% year-over-year jump, according to a report by BloombergNEF.2 That said, the rebuilding of our global energy systems, infrastructure and technology to support the low-carbon transition present 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. Ask your Morgan Stanley Financial Advisor for a copy of our investment primer, Climate Action: Positioning Your Portfolio for Decarbonization, to learn more about six key technologies that offer promising solutions for climate change mitigation.

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 that meets their financial and impact objectives.

The Morgan Stanley Investing with Impact Platform offers the “three I’s of Impact” framework for investors to consider through the lens of climate action investing:

1.    The intentionality of the investment process through three key approaches:

  • 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. 
  • 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.
  • Climate solutions—which involves investing in decarbonization technologies and solutions that address a changing climate in order to position for opportunities.

2.    The influence exercised by shareholders to alter corporate behavior: This can be an effective tool to drive positive environmental change through active dialogue with carbon-intensive investment companies, without having to remove any portfolio holdings.

3.    The role of advancing inclusion through a portfolio: Increasingly, climate action investors may consider inclusion as part of their investment selection process and examine the diversity of an asset management firm’s ownership and/or the investment professionals guiding the investment processes before investing. In the context of climate action, there is heightened awareness of the complex ways that climate change and the corresponding responses coincide with issues of racial justice and gender equality.

Your Morgan Stanley Financial Advisor can help you identify investment products and solutions that are helping to drive these kinds of positive climate outcomes. In addition, new tools are making it easier to measure your portfolio’s alignment to your climate action investment objectives. These tools include:

  • Morgan Stanley Impact Quotient®: This patented impact reporting tool enables you to identify and prioritize more than 130 social and environmental impact preferences and harness data to make investment decisions aligned with those goals. Using this application, a Morgan Stanley Financial Advisor can help you identify your portfolio’s exposure to companies with traditional fossil fuel reserves, as well as companies that are leading the way in managing their own carbon emissions and natural resource use. You can also identify strategies for investing in companies that are contributing to climate solutions, such as energy-efficiency technologies, water infrastructure, sustainable agriculture, electric vehicles and lower-carbon products and services.
  • Morgan Stanley’s Impact Signal: Impact Signal, one of the industry’s first holistic manager scoring tools, allows Morgan Stanley Financial Advisors to evaluate more than 20,000 funds and SMAs globally on the strength of their investment process and environmental and social impact. This tool focuses on evaluating (1) intentionality, represented by a documented process for considering environmental and social factors in the investment process and the subsequent positive impact of the underlying holdings; and (2) influence, which evaluates engagement with portfolio companies to encourage them to be better environmental and social stewards.

Connect with your Morgan Stanley Financial Advisor to build a portfolio that’s aligned with your unique climate action goals and financial objectives.

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