Morgan Stanley
  • Wealth Management
  • Apr 19, 2024

How to Tackle Climate Change in Your Portfolio

As the world increasingly transitions to a low-carbon economy, explore how you can pursue your climate action goals alongside your financial objectives.

Emily Thomas Head of Investing with Impact, Wealth Management

Many investors are seeking new ways to meet both their climate action goals and financial return objectives. According to the Morgan Stanley Institute for Sustainable Investing, 84% of the general population and 96% of Millennial investors are interested in sustainable investing—with climate issues a top priority for many of them.

A changing climate and the transition to a low-carbon economy are presenting material investment risks and opportunities. As supportive climate policies emerge on a global scale and the private sector increasingly introduces ambitious climate commitments, it is clear that capital will have a pivotal role to play. 

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Investors can explore ways to advance climate solutions and align their capital with the low-carbon transition using a range of products, including mutual funds, exchange-traded funds (ETFs) and separately managed accounts. 

Still, a couple 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 Rocky Mountain Institute (RMI), nearly 8,000 companies, representing more than a third of the global economy by market capitalization, have either committed to science-based targets or had such targets independently verified through the U.N.-backed Science Based Targets Initiative (SBTi).1
  • Are climate-solution investments only focused on renewable energy? Companies are increasingly focused on reducing their energy-related emissions across their operations and supply chain. Corporations around the world agreed to buy more renewable energy in 2023 than they did the year before, with more than 450 companies committing to purchase a record 46 gigawatts, a 13% year-over-year jump, according to a report by BloombergNEF.2 That said, the rebuilding of our global energy systems, infrastructure and technology to support the low-carbon transition present multiple climate investment opportunities outside of just renewable energy. These include electric vehicles, smart grids, energy storage, green hydrogen and carbon capture, to name a few. Ask your Morgan Stanley Financial Advisor for a copy of our investment primer, Climate Action: Positioning Your Portfolio for Decarbonization, to learn more about six key technologies that offer promising solutions for climate change mitigation.

Climate Action Investment Approaches

Investors seeking to mitigate climate change-related risks and identify opportunities that aid in the transition to a low-carbon economy have a variety of ways to develop a climate action investing strategy that meets their financial and impact objectives.

The Morgan Stanley Investing with Impact Platform offers the “three I’s of Impact” framework for investors to consider through the lens of climate action investing:

1.    The intentionality of the investment process through three key approaches:

  • Restriction screening, which involves reducing or seeking to eliminate exposure to companies tied to coal, oil, gas and other high greenhouse-gas-emitting energy sources and activities to mitigate risks. 
  • ESG integration, which involves incorporating environmental criteria into the investment selection process. Climate considerations to potentially integrate alongside financial metrics in order to identify environmental leaders include a company’s carbon footprint, use of natural resources and the amount of revenue derived from products or services that provide climate solutions. This approach can also help investors mitigate climate change-related risks and evaluate them as part of buy and sell decisions.
  • Climate solutions—which involves investing in decarbonization technologies and solutions that address a changing climate in order to position for opportunities.

2.    The influence exercised by shareholders to alter corporate behavior: This can be an effective tool to drive positive environmental change through active dialogue with carbon-intensive investment companies, without having to remove any portfolio holdings.

3.    The role of advancing inclusion through a portfolio: Increasingly, climate action investors may consider inclusion as part of their investment selection process and examine the diversity of an asset management firm’s ownership and/or the investment professionals guiding the investment processes before investing. In the context of climate action, there is heightened awareness of the complex ways that climate change and the corresponding responses coincide with issues of racial justice and gender equality.

Your Morgan Stanley Financial Advisor can help you identify investment products and solutions that are helping to drive these kinds of positive climate outcomes. In addition, new tools are making it easier to measure your portfolio’s alignment to your climate action investment objectives. These tools include:

  • Morgan Stanley Impact Quotient®: This patented impact reporting tool enables you to identify and prioritize more than 130 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 lower-carbon products and services.
  • Morgan Stanley’s Impact Signal: Impact Signal, one of the industry’s first holistic manager scoring tools, allows Morgan Stanley Financial Advisors to evaluate more than 20,000 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.

Connect with your Morgan Stanley Financial Advisor to build a portfolio that’s aligned with your unique climate action goals and financial objectives.

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Footnotes

1 RMI. “Corporate Climate Action: Analyzing the Recent Surge of Climate Commitments.” November 2023. https://rmi.org/corporate-climate-action-analyzing-the-recent-surge-of-climate-commitments/

2 Bloomberg. “European Firms Nearly Doubled Purchase of Clean Power in 2023”. February 2024. https://news.bloomberglaw.com/mergers-and-acquisitions/european-firms-nearly-doubled-purchase-of-clean-power-in-2023

Risk Considerations

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.  Technology stocks may be especially volatile.

International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.

Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

Certain securities referred to in this material may not have been registered under the U.S. Securities Act of 1933, as amended, and, if not, may not be offered or sold absent an exemption therefrom.  Recipients are required to comply with any legal or contractual restrictions on their purchase, holding, and sale, exercise of rights or performance of obligations under any securities/instruments transaction.

Disclosures:

The returns on a portfolio consisting primarily of sustainable investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because sustainability criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors, including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors.  Morgan Stanley Wealth Management is involved in many businesses that may relate to companies, securities or instruments mentioned in this material.

This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument.  That information would contain material information not contained herein and to which prospective participants are referred. This material is based on public information as of the specified date, and may be stale thereafter.  We have no obligation to tell you when information herein may change.  We make no representation or warranty with respect to the accuracy or completeness of this material.  Morgan Stanley Wealth Management has no obligation to provide updated information on the securities/instruments mentioned herein.

The securities/instruments discussed in this material may not be appropriate for all investors.  The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.  Morgan Stanley Wealth Management recommends that investors independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors.  Estimates of future performance are based on assumptions that may not be realized.  Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates.  Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Morgan Stanley Wealth Management does not represent that any such assumptions will reflect actual future events.  Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein.

This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Wealth Management is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended or under section 4975 of the Internal Revenue Code of 1986 as amended in providing this material except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

This material is disseminated in Australia to “retail clients” within the meaning of the Australian Corporations Act by Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813).

Morgan Stanley Wealth Management is not incorporated under the People's Republic of China ("PRC") law and the material in relation to this report is conducted outside the PRC. This report will be distributed only upon request of a specific recipient. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors must have the relevant qualifications to invest in such securities and must be responsible for obtaining all relevant approvals, licenses, verifications and or registrations from PRC's relevant governmental authorities.

If your financial adviser is based in Australia, Switzerland or the United Kingdom, then please be aware that this report is being distributed by the Morgan Stanley entity where your financial adviser is located, as follows: Australia: Morgan Stanley Wealth Management Australia Pty Ltd (ABN 19 009 145 555, AFSL No. 240813); Switzerland: Morgan Stanley (Switzerland) AG regulated by the Swiss Financial Market Supervisory Authority; or United Kingdom: Morgan Stanley Private Wealth Management Ltd, authorized and regulated by the Financial Conduct Authority, approves for the purposes of section 21 of the Financial Services and Markets Act 2000 this material for distribution in the United Kingdom.

Morgan Stanley Wealth Management is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the “Municipal Advisor Rule”) and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule.

This material is disseminated in the United States of America by Morgan Stanley Smith Barney LLC.

Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data.

This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney LLC.

© 2024 Morgan Stanley Smith Barney LLC, Member SIPC.

CRC# 3497822    (04/2024)

Disclosures

The returns on a portfolio consisting primarily of sustainable investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because sustainability criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors, including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors.  Morgan Stanley Wealth Management is involved in many businesses that may relate to companies, securities or instruments mentioned in this material.

This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument.  That information would contain material information not contained herein and to which prospective participants are referred. This material is based on public information as of the specified date, and may be stale thereafter.  We have no obligation to tell you when information herein may change.  We make no representation or warranty with respect to the accuracy or completeness of this material.  Morgan Stanley Wealth Management has no obligation to provide updated information on the securities/instruments mentioned herein.

The securities/instruments discussed in this material may not be appropriate for all investors.  The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.  Morgan Stanley Wealth Management recommends that investors independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors.  Estimates of future performance are based on assumptions that may not be realized.  Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates.  Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Morgan Stanley Wealth Management does not represent that any such assumptions will reflect actual future events.  Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein.

This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Wealth Management is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended or under section 4975 of the Internal Revenue Code of 1986 as amended in providing this material except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

This material is disseminated in Australia to “retail clients” within the meaning of the Australian Corporations Act by Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813).

Morgan Stanley Wealth Management is not incorporated under the People's Republic of China ("PRC") law and the material in relation to this report is conducted outside the PRC. This report will be distributed only upon request of a specific recipient. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors must have the relevant qualifications to invest in such securities and must be responsible for obtaining all relevant approvals, licenses, verifications and or registrations from PRC's relevant governmental authorities.

If your financial adviser is based in Australia, Switzerland or the United Kingdom, then please be aware that this report is being distributed by the Morgan Stanley entity where your financial adviser is located, as follows: Australia: Morgan Stanley Wealth Management Australia Pty Ltd (ABN 19 009 145 555, AFSL No. 240813); Switzerland: Morgan Stanley (Switzerland) AG regulated by the Swiss Financial Market Supervisory Authority; or United Kingdom: Morgan Stanley Private Wealth Management Ltd, authorized and regulated by the Financial Conduct Authority, approves for the purposes of section 21 of the Financial Services and Markets Act 2000 this material for distribution in the United Kingdom.

Morgan Stanley Wealth Management is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the “Municipal Advisor Rule”) and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule.

This material is disseminated in the United States of America by Morgan Stanley Smith Barney LLC.

Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data.

This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney LLC.

© 2022 Morgan Stanley Smith Barney LLC, Member SIPC.

CRC# 5243162 (11/2022)

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