Morgan Stanley
  • Wealth Management
  • Apr 8, 2021

Risks and Opportunities of Climate Change

Climate change presents risks, but there are ways for investors to take part in positive change.

As extreme weather events make global headlines and 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 nearly eight inches since 1880,1 a process that is rapidly accelerating2 and threatening major global cities like Jakarta, Lagos, and Miami.3 We’ve seen extreme weather events play out across the world, including the California wildfires which created an eerie orange glow in the sky for many of our colleagues and clients.

But it’s not necessarily all doom and gloom. 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 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 investors can play a role in mitigating them through their portfolio investments.

Damage to Buildings and Operations

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

Opportunity: Companies around the world are preparing for climate change and as a result, they are investing in resilient buildings that can better withstand damage from storms, strong winds and flooding.

Developing countries may offer investment opportunities in new construction and infrastructure projects that are built to hold up under extreme weather events. In the U.S., 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. A recent study of the construction industry found that nearly half of companies expect that green building projects will account for more than 60% of their work by 2021, up from just 27% in 2018.4

Opportunity Cost

Risk: Companies that stick with processes and products that are seen as environmentally “dirty” can miss out on new opportunities for growth.

Opportunity: Invest in companies that are on the leading edge of creating products that help the environment and also help other companies get out of heavy carbon emitting industries.

We launched the Morgan Stanley Impact Quotient® application in the summer of 2019, to help investors align their investments with unique environmental and social goals and avoid objectionable sectors or geographies. Investors can evaluate their portfolio across 100+ environmental and social issues such as Energy Efficiency, Renewable & Cleaner Energy, and Environmental Leaders in Traditional Energy, as well as those with sustainable corporate practices such as Carbon Emissions Reporting.

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 17% from 2018 to 2019 and has fallen more than 80% since 2010.5 Wind and solar now account for 56% of global electricity generation, but these clean technologies, along with batteries, will comprise 80% of the $15.1 trillion invested in new power capacity over the next 30 years.6

Risk: Companies that stick with processes and products that are seen as environmentally “dirty” can miss out on new opportunities for growth.

Risk: Companies that stick with processes and products that are seen as environmentally “dirty” can miss out on new opportunities for growth.

Risk: Companies that stick with processes and products that are seen as environmentally “dirty” can miss out on new opportunities for growth.

Reputational Risk

Risk: Customers may shun a company that is involved in an environmental or public relations crisis.

Opportunity: Invest in all sectors, but choose companies with the best quantitative and qualitative disclosure and management practices.

One approach is to invest across all 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. 

Disruption of Food and Water Supply

Risk: A shortage of drinking water or food can affect companies in parts of the world prone to droughts, heat waves or pollution.

Opportunity: Invest in sustainable and resilient agriculture and water infrastructure or carefully evaluate companies with operations tied to parts of the world where food or water could be scarce and avoid them if the risks are too great.

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 30% by 2070, thanks to climate change.7

Seizing These Opportunities

A Morgan Stanley Financial Advisor can help identify opportunities for climate solutions investments, such as companies that are developing new and innovative technologies for renewable and alternative energy sources. Examples include:

  • Leveraging existing portfolio solutions that:

- address multiple environmental themes focused on climate change mitigation and adaptation as well as

- seek to advance key environmental United Nations Sustainable Development Goals, such as Affordable and Clean Energy, Industry Innovation and Infrastructure, and Climate Action, or

  • Creating a custom solution tailored to specific financial and impact goals

Another option is an automated investment platform that includes climate solutions to account for some of these environmental risks and opportunities.

It’s not just for the equity side of a portfolio either. Investors can buy bonds of companies with sound environmental policies or choose to buy corporate bonds issued as “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 now exceeding $1 trillion.8 Investors with the goal of achieving positive environmental impact can look to green bonds for an accessible way to invest in low-carbon assets that may receive a similar return to a traditional bond.

Finally, qualified investors can generate additional positive environmental impact by accessing opportunities in the private markets (private equity, real estate and hedge funds), which could include projects such as developing sustainable agriculture solutions or financing green energy projects.

As someone who spends time understanding the influence of climate change on investors’ portfolios, as well as the emerging opportunities to help create a lower carbon economy, I believe that the most important thing is to take 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.

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