The true impact of climate change on corporations’ investment portfolios

Despite increased awareness of the opportunities, many investors are confused about the impact of carbon risk and climate change on their portfolio

Arid land is more common across the world, as seen here on the banks of the Yamuna river in Allahada, India, as global warming continues to increase 

Sustainability has fast become a buzzword in investment circles. Debate about demand destruction, carbon risk and environmental degradation is circulating not just in households but in boardrooms around the world, and few – if any – major companies can afford to take their eye off the risks associated with climate change if they are to thrive in this changed landscape.

The seeds of realisation are only now beginning to take root, and factors other than financial returns are featuring front and centre in the minds of major investors. Where once the theory held that sustainable investing involved a trade off between impact and financial performance, the belief that sustainability can drive financial outperformance is widespread. Investors are coming around to the thinking that climate change – more specifically an overdependence on fossil fuels – presents both risks and opportunities for investments, yet the ‘plethora of choices’ – according to Morgan Stanley – has them ‘paralysed into inaction’.

A new investor toolkit introduced by Morgan Stanley’s Wealth Management division proposes actionable approaches for different portfolios, and seeks to address any qualms held by investors about impact – or sustainable – investing. World Finance spoke to Lily Trager, Director of Morgan Stanley Wealth Management’s Investing with Impact Platform, about the new toolkit and how a climate and fossil fuel aware portfolio, if managed correctly, can achieve consistent results.

Ageing demographics, growing population, access to energy, food, and water, all of these macro trends are intricately intertwined with the issue of climate change

How has Morgan Stanley spread awareness of the risks and opportunities associated with climate change?
At Morgan Stanley we have been dedicated to accelerating the adoption of sustainable investing – which in our definition is to deliver competitive financial returns as well as generate a positive environmental and social impact – for some time now. Our efforts are part of a firm-wide integrated initiative, and we are committed to pioneering scalable, sustainable financial solutions, building sustainable investment tools and generating industry-leading insight to help empower investors when making choices in line with their values and worldview.

At Morgan Stanley Wealth Management, we launched our Investing with Impact platform in 2012, and have continued to grow and innovate the platform as the industry evolves. I think we have seen an acceleration in the last few years in terms of product proliferation: innovative strategies that are scalable and commercial, achieving market-rate financial returns and generating a measurable, positive environmental and social impact. So certainly product proliferation has helped to propel this into the mainstream, alongside client interest and an increase in demand across segments, individuals and institutions.

Can you tell us about the launch of your latest investor toolkit?
The latest addition to the Investor with Impact platform came in February when we launched the second in a series of Morgan Stanley Wealth Management Investing with Impact toolkits. This one was on the subject of climate change and fossil fuel aware investing, and builds on the success of our first toolkit on faith-based investing, which launched last summer.

What we found is that, despite increasing discussion around the role of climate change risk and opportunities in the markets, many investors remain confused or unsure about the impact of carbon risk and climate change in their investments and what options they have.

Our goal with the toolkit was to make this theme easily actionable through traditional Morgan Stanley Wealth Management channels: through a framework of different approaches that can help clients achieve goals related to climate change and fossil fuel awareness in the context of their investment portfolios. Often we will sit in client meetings with institutional or individual clients and witness a sort of analysis paralysis on the subject of climate change and fossil fuels. So the toolkit aims to clarify the somewhat politicised and confusing conversation, and create a framework that is actionable for our clients.

What has the response been like so far?
The pick-up has been quite good in terms of unique users. We’ve been very surprised by the reaction. But frankly I think we were all quite surprised at how strong the dialogue around fossil fuel divestment and climate change has been. It has really emerged as the topic of the year – of the decade perhaps. So this theme has really been on the minds of investors, and I think that the toolkit created an outlet for our financial advisors to be able to have conversations with their clients around this theme, and really show them ways to build a low carbon economy in the context of their investment portfolio.


Amount Earth has warmed since 1880


The degree of certainty climate scientists have recent warming is man-made


Tonnes of carbon can be burnt, forever, if Earth is to stay below dangerous levels of climate change

250 million

People will be displaced by climate change by 2050

What do you make of the notion that sustainable investment comes at the expense of profitability?
There is a preconceived notion that sustainable investing and the Investing with Impact broadly involves a trade off between impact performance and financial performance. Much of this misunderstanding is rooted in the earliest strategies, some of which were mutual funds or separately managed accounts launched in the 1970s that took broad market indices and divested what was referred to at the time as ‘sin’ stocks: alcohol, tobacco, nuclear and weapons. Those strategies were not re-optimised to adjust for any factor over or under exposure relative to the broad market index and, as a result, some experienced underperformance.

What we find today is that restriction screening, when used, is much more sophisticated; much more institutionalised by nature, and takes into consideration some of the factors over and under that result from the screening process. There is also a strong reliance on environmental, social and governance integration, so as an asset manager you’re actually considering a broader set of data to help make an investment decision.

The Morgan Stanley Institute for Sustainable Investing undertook an analysis of 10,000 mutual funds and 3,000 separately managed accounts, and looked at the performance of traditional strategies compared to those that are sustainable over a seven-year period. 64 percent of the time the sustainable strategies outperformed the traditional with equal or less risk. Emphasising that the business case is strong for Investing with Impact. Certainly our research aligns with a lot of the other research done on this subject, but what ultimately matters is manager selection and building a complimentary portfolio to achieve a client’s financial and impact goals.

How influential was Paris in bringing these issues to the fore?
The Paris climate talks were a single data point I would say. Certainly it underscored a strong commitment to achieving global collaboration, and that was perhaps an unexpected upside, so I think that we see that as a data point. But really we’ve seen the dialogue around fossil fuel divestment sparked by, in terms of taking an activism stance, really become a mainstream conversation.

That movement has in and of itself truly permeated boardrooms, conversations around kitchen tables, and asset managers, and has really been a catalyst for speaking about climate change and fossil fuel awareness – both risks and opportunities – in the context of building an investment portfolio. Ageing demographics, growing population, access to energy, food and water – all of these macro trends are intricately intertwined with the issue of climate change. So the dialogue around climate change is extremely pervasive.

What’s next for Morgan Stanley’s Investing with Impact Platform?
The Investing with Impact Platform is constantly growing, innovating, evolving. So… stay tuned. More specifically, we’re developing engaging education and awareness programmes for our financial advisors.

We are continuing to on board very innovative quality investment strategies across public and private markets for our clients, as well as building tools and resources that can really help our clients to align their investments with their values. We continue to improve the Investing with Impact platform on a very regular basis.