Morgan Stanley
  • Institute for Sustainable Investing
  • Dec 18, 2019

Climate Change as an Investment Megatrend

Investors, regulators and companies are establishing new standards in their commitment to mitigate climate change risks through the capital markets.

Between 2016 and 2018, climate change-related weather events caused more than $630 billion in economic damage worldwide.

Climate change has become an investment megatrend. With wildfires, heat waves and major hurricanes growing in frequency and intensity, and global financial regulatory activity gaining momentum, investors are waking up to the implications of climate change.

Between 2016 and 2018, climate change-related weather events caused more than $630 billion in economic damage worldwide.1 It’s one of the biggest catalysts spurring investors, companies and regulators to accept climate change factors as essential to investment analysis and corporate disclosure, according to Mary Schapiro, Vice Chair of the Sustainable Accounting Standards Board and Task Force on Climate-Related Financial Disclosures (TCFD).

Schapiro, former chair of the U.S. Securities and Exchange Commission, was joined by climate scientist Dr. Rosina Bierbaum, a former U.S. presidential advisor on science and technology, for a recent discussion at Morgan Stanley’s Sustainable Investing Summit.

“We know climate change is affecting the frequency and severity of extreme weather events thanks to advancements in attribution analysis,” the science of determining climate change’s influence on the probability or intensity of those events, Bierbaum says. “Climate risk goes far beyond any individual storm or forest fire. It’s important for investors to develop a broad understanding to help inform their investment decisions.”

Global financial regulators are increasingly treating climate change as a systemic financial risk.

Climate Change as Financial Risk

As of 2019, 78% of U.S. individual investors surveyed by Morgan Stanley’s Institute for Sustainable Investing said they were interested in addressing climate change through their investments.2 Of the group polled, 85% said they were interested in sustainable investing at large, a 14 percentage-point increase from 2015.3 With $30 trillion in global assets now incorporating sustainability criteria,  investors’ growing focus on this issue is noteworthy.4

"While demand for sustainable investing is on the rise, global financial regulators are increasingly treating climate change as a systemic financial risk," Schapiro said. The Federal Reserve Bank of San Francisco recently hosted its first climate conference, where it addressed the risks that climate change poses to a healthy, stable economy by disrupting health care, education and electronic payments, among other industries.5 Similarly, in its inaugural 2019 report, the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) identified climate change as a unique source of structural risk affecting the financial system and noted that asset valuations do not fully reflect climate-related risks.6

As investors and regulators increase their scrutiny, companies are focusing on providing more material information about climate change-related risks. Initiatives like the TCFD have helped focus companies’ climate change reporting to provide investors with more decision-useful information.

“TCFD was born out of the need for more informed decision-making in light of the increased urgency around climate change,” Schapiro says. “By working closely with stakeholders in the business and investment communities, TCFD has developed tools and resources that are helping raise the bar on corporate climate disclosure.”

Options for integrating climate change into investment strategies have expanded and become more sophisticated as the availability and granularity of climate data has improved. Approaches like restriction screening, environmental, social and governance integration, thematic and impact investing and shareholder engagement provide investors with a broad range of strategies to meet their financial and impact goals.

“As Rosina illustrated, the science is clear. The climate is changing and will have significant implications for the investment community writ large,” Schapiro says. “It may still seem foreign to some, but including climate change as a factor in investment decision-making will soon be as commonplace as reviewing a company’s financial statements.”