Morgan Stanley
  • Wealth Management
  • Mar 29, 2023

4 Ways Investors Can Act on Climate Change

Investors can help play an active role in mitigating climate change-related risks and aiding the shift to a lower-carbon economy.

As scientists increasingly warn about the negative impacts a changing climate could have on our global ecosystems, economies and human livelihoods, more investors are thinking about how environmental and social risks tied to climate change could affect their portfolios.

As someone who creates investment portfolios that aim to have positive social and environmental impact, I’ve seen that investors can play a role in tackling climate change and aiding in the transition to a lower-carbon economy. Here are four significant business risks associated with climate change and opportunities for investors.

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1. Damage to Buildings and Operations:

Risk: Physical damage to buildings, supplies and equipment due to flooding or other extreme weather events can be costly. These events can disrupt business and supply chains by halting manufacturing or making it impossible for employees to get to work.

Opportunity: Consider investing in companies that have products or services that support increased efficiency and resiliency of homes and buildings. Potential investments include companies that help refit existing buildings or reinforce existing energy infrastructure. There are also opportunities to invest in companies taking on new construction and infrastructure projects that are built to be more energy efficient and withstand severe weather events.

2. Stranded Assets:

Risk: As energy demand shifts toward lower-carbon sources, companies such as oil, gas and coal producers face being left with fossil-fuel reserves and other “stranded” assets that they cannot use to their full projected value. This poses a risk for specific companies or even entire sectors.

Opportunity: Consider investing in companies in heavy-carbon-emitting sectors like energy or mining that are embracing the energy transition. These companies could be actively selling existing reserves as well as investing in energy-efficient products and low-carbon alternatives.

In addition to identifying companies that are leading in the energy transition, investors could also benefit from investing directly in lower-carbon technologies, such as renewable energy, electric vehicles, battery storage, hydrogen power, and carbon-capture utilization and storage. Such industries may benefit from increased policy support and rising demand as the world transitions to less carbon-intensive energy sources.  

3. Reputational Risk:

Risk: Consumers may shun a company that is involved in an environmental public relations crisis—for example, an oil and gas company responsible for an oil spill in the ocean or a clothing manufacturer that is exposed for excessive textile pollution. This could negatively impact a company’s sales and revenue.

Opportunity: Consider identifying companies with leading sustainable corporate practices across various industries.

With the help of your Financial Advisor, you can consider a company’s environmental and social priorities, alongside traditional financial metrics. This may include a company’s climate disclosures, carbon footprint, use of natural resources and waste management practices. You can also evaluate social and governance criteria, such as operational efficiency and employee safety, as well as diversity of the board of directors and senior management.

With this approach, investors may be able to avoid exposure to the worst offenders who may face negative financial, reputational and legal consequences.  

4. Pressure on Natural Resources:

Risk: A shortage of drinking water or an excessive strain on natural resources and food supplies can be costly to companies. In the U.S., 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 31% by 2070 as a result of climate change.3

Opportunity: Consider investing in companies that support natural resource efficiency, resilient infrastructure, food and water security, and sustainable agriculture. Be sure to carefully evaluate companies with operations tied to parts of the world where food or water could be scarce and avoid if the risks are too great.

Working with Your Morgan Stanley Financial Advisor

Your Morgan Stanley Financial Advisor can help identify potential climate-related risks in your portfolio, as well as new investment opportunities. This could include:

  • Leveraging existing portfolio products and solutions that address themes focused on climate change mitigation and adaptation, as well as seeking to advance key environmental United Nations Sustainable Development Goals, such as affordable and clean energy, industry innovation and infrastructure, and climate action.
  • Creating a custom solution that tailors to specific financial and impact goals.

In addition, Morgan Stanley Impact Quotient®, our patented4 impact reporting tool, can help you align your investments with your unique environmental and social goals. With this tool, you can evaluate your portfolio across 100+ environmental and social metrics. These metrics include:

  • Revenue exposure from products and services tied to impact solutions, such as sustainable agriculture, renewable energy, affordable housing, and waste management.
  • Sustainable internal corporate practices, such as natural resource use, climate disclosure, employee treatment, and alternative energy use.

Another option is an automated investment platform that can be customized to include investments tied to environmental, social, and governance (ESG) criteria.

A changing climate is one of the defining issues of our time, posing significant risks to global health, food, water and energy security. It also presents a significant opportunity for investors to capitalize on the magnitude of the transition to a lower-carbon economy. For additional information, please consult with a Morgan Stanley Financial Advisor and request a copy of the Morgan Stanley Investing with Impact team’s climate action primer.

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