How to Tackle Climate Change in Your Portfolio

By Lily Trager
Wealth Management, Head of Investing with Impact

In the U.S., polarization over the future of energy policy and recent government actions taken to diversify energy sources as a means to limit environmental impact and meet demand seems only to have grown.

Many investors, however, are done with talk and are ready for action, seeking new ways to benefit both people and the planet. According to the Morgan Stanley Institute for Sustainable Investing, 85% of the general population and 95% of Millennial investors are interested in sustainable investing—with climate issues a top priority for many of them.

While the challenges of combating climate change require a global effort, the opportunity to invest in a more resilient and positive future while meeting individual financial goals does exist. Investors increasingly are exploring ways to drive positive climate outcomes using a range of products, including mutual funds, exchange-traded funds (ETFs), and separately managed accounts.

Still, a few 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 Science Based Targets, more than 1,700 companies globally have committed to reducing their carbon footprint.¹

• Are climate-solution investments only focused on renewable and alternative energy? More companies are focusing on developing and using a diversified energy mix across their operations and supply chain, including renewable energy. For example, more than 300 of the world’s most influential companies have committed to sourcing 100% of their global energy needs from renewable sources.² However, it will also take infrastructure improvements to support this transition, which presents additional investment opportunities, such as smart grids, energy storage, control systems, and distributed generation, to name a few.

• What are other investment opportunities in related sectors? Agriculture and food companies are working to reduce the environmental impact of food production and distribution—an important sign of progress, given that the agriculture sector is a major contributor of greenhouse-gas emissions in the US. The Plant-Based Foods Association and the Good Food Institute reported that US retail sales of plant-based foods, which have a lower carbon footprint than animal protein, grew 27% in 2020, bringing the total market to $7 billion.³ Morgan Stanley anticipates this market will continue to grow, creating opportunities for investors.

Your Morgan Stanley Financial Advisor can help you identify companies, funds and partners that are helping to drive these kinds of positive climate outcomes. In addition, new tools are making it easier to measure your portfolio’s environmental impact, including exposure to climate risks and alignment with climate solutions and opportunities. These tools include:

• Morgan Stanley Impact Quotient®: This award-winning³ application enables you to identify and prioritize more than 100 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 alternative-energy products and services.

• Morgan Stanley’s time-tested Climate Change and Fossil Fuel Aware framework, a straightforward approach to incorporating climate-related risks and opportunities into investment considerations and reducing carbon exposure across asset classes. Recently launched Impact Signal, one of the industry’s first holistic manager scoring tools which allows us to evaluate over 15,000 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.

More investors are seeking to align their capital with their vision for a more sustainable world, including financing climate solutions. With new corporate commitments and widespread investor interest, the private sector can play a pivotal role in accelerating solutions to one of the greatest systemic issues of our time.

Connect with a Morgan Stanley Financial Advisor to build a portfolio that’s aligned with your unique goals and values.

¹_{Science Based Targets. “Ambitious Corporate Climate Action.” 2021. https://sciencebasedtargets.org/}
²_{The RE100. Climate Group. 2021. https://www.there100.org/}
³_{Morgan Stanley. “Morgan Stanley Wins Three Industry Awards from Money Management Institute and Barron’s for Innovation in Investment Advisory Solutions.” 2019. https://www.morganstanley.com/press-releases/morgan-stanley-wins-three-industry-awards-from-money-management-}