Morgan Stanley
  • Research
  • Sep 18, 2015

Investing in Extremes

The rising incidence of disruptive weather events need not all be on the cost side of the ledger, for those who can embrace both the growth opportunities and the risks.

Mention "climate change" and listeners will either nod with kneejerk concern or roll their eyes in skepticism. But say "extreme weather" and just about everyone has a recent story to share. Be it the storm of the week, the drought that won't quit, unseasonal stretches of heat or deep freeze and blizzards, the impact has been global—and getting worse.

Businesses large and small often feel it directly on their bottom lines. Maybe it's flooding that shuts down or damages offices, shops or distant factories; washed out delivery routes; crop failures and strained supply lines; higher insurance premiums or payouts; lost productivity at greater cost. Indeed, five of the top 10 companies in the S&P 500 cited growing business risk from climate change in their financial filings in 2014.

Signs That Extreme Weather Events Are Becoming More Common

*Note: The US Climate Extremes Index is the arithmetic average of temperature, drought, precipitation, land-falling tropical storm and hurricane wind velocity indicators of the percentage of the coterminous US area. An example of the indicators would be “The sum of (a) percentage of the US with maximum temperatures much below normal and (b) percentage of the US with maximum temperatures much above normal."
Source: National Center for Environmental Information

But disruption from climate change need not all be on the costs side of the ledger, according to a recent report, "Addressing Climate Change and the Investment Implications," from Morgan Stanley's Sustainable + Responsible Investing Research team. "Alongside material risks, growth opportunities exist for sectors that can provide climate change solutions," says Eva Zlotnicka, the lead analyst on the report.

Governments and companies around the world are still coming to grips with how to position for this new reality. Prominent thought leaders arrive in New York City in mid-September for a weeklong climate summit to share best practices and new ideas. In December, 200 nations will gather in Paris to try to hammer out a universal—and legally binding—agreement to address climate change.

If and when new standards, rules, targets and practices are accepted and put into effect, the transition could be global. The key focus will still be on greenhouse gas emissions and how we can reduce or even reverse them. Renewable technologies, such as solar and wind power, continue to gain ground in terms of power generation, as well as price competitiveness versus newly built fossil fuel plants, Zlotnicka notes.

Battery Prices Are Projected to Drop by ~70%-85% by 2035

Source: US Energy Information Administration

While solar and wind power often get top billing, other areas are just as important. For example, more scalable and less expensive battery technologies with broad industrial and residential applications may make renewables more cost effective and revolutionize power distribution and grids. They could also finally lead to the long-awaited mass-market adoption of electric cars.

Technologies and businesses that focus on helping traditional industries make the transition to cleaner, more sustainable practices will also benefit. For example, developers and engineering firms that build greener buildings or convert older structures to more efficient use of energy and water. Then there are still developing technologies around carbon capture and storage that aim to, not only arrest, but reverse the growing carbon-emission trend line. 

A global framework for carbon pricing and trading could make the biggest dent in climate change by putting a financial price tag on greenhouse-gas emissions. Such a framework could become the basis for an international marketplace that incentivizes governments and corporations to cap and reduce emissions, or at least pay a market rate. It could also ramp efforts to boost energy efficient technologies that may contribute as much as 38% toward reaching global goals to reduce carbon emissions, according to the US Energy Information Administration.

While, the up-front capital investment required for many of these initiatives will be substantial, opportunities abound to mitigate risks and create long-term value through greater efficiency, productivity and sustainability. More and more investors are seeking investments in companies that will not only generate positive returns, but also create a positive environmental impact. The business case for sustainable investing has never been stronger.

For more Morgan Stanley Research on the risks and opportunities tied to climate change, ask your Morgan Stanley representative or a Financial Advisor for the report “Addressing Climate Change and the Investment Implications” (August, 2015). Plus, explore more Ideas.

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