It’s an approach that leaders from the Beltway to Wall Street have been offering more and more loudly in recent years. Dominic Barton of McKinsey & Co. advocated in a 2011 op-ed1 that the investment community “fight the tyranny of short-termism.” More recently, Morgan Stanley CEO James Gorman urged investors to incorporate companies that prioritize long-term sustainability into their portfolios.2

Much of the attention on short-termism has a role in today’s increasingly volatile markets, particularly in the wake of the Great Recession. With a greater long-term focus, a growing body of evidence suggests, companies’ financial performance becomes more predictable—and often, as it happens, more profitable3. But a related thread runs parallel to that discussion: the appreciation of massive economic threats posed by climate change, the ultimate long-term risk.

“Far from being just an exercise in risk mitigation,” Gorman wrote4 in a publication appropriately titled Focusing Capital on the Long Term, “[sustainability] represents a significant growth opportunity for those companies that successfully anticipate the products, strategies, and services that the future will demand.”

A Global Investor Survey5 found that 81 percent of asset owners and 68 percent of asset managers viewed climate change as “a material risk or opportunity across their entire investment portfolio,” while The Economist Intelligence Unit estimates—conservatively—that private investors are at risk of losing $4.2 trillion between now and the turn of the next century because of a warming planet.

In the face of escalating effects from climate change, 2016 looks to be a tipping point in action given international negotiations among more than 190 nations concerning carbon emission regulations7. But what makes this year’s discussions different from climate conferences in the past is the vocal support from the investment community of sustainable business practices and government policies worldwide.

According to the Intergovernmental Panel on Climate Change, the net damage costs of climate change will only increase over time8. Sea level rise, heat waves, flooding and wildfires will keep impacting the U.S.—not to mention the rest of the world—as gigatonnes of carbon continue to pour into earth’s atmosphere.9

“As someone who has spent a good deal of time assessing risk and dealing with crises, I’m struck by the similarities between the climate crisis and the financial crisis of 2008,” wrote Henry Paulson, founder and chairman of the Paulson Institute at the University of Chicago, former U.S. treasury secretary, and former chairman and CEO of Goldman Sachs, in an April 2015 commentary10. “The greenhouse-gas crisis, however, won’t suddenly manifest itself with a burst, like that of a financial bubble. Climate change is more subtle and cruel. It’s cumulative.”

Paulson joined with former New York City Mayor Michael Bloomberg and philanthropist Tom Steyer to measure the financial cost of climate change for three specific sectors11 of the U.S. economy: agriculture, energy, and real estate. The results—using current emissions as a benchmark—“were sobering,” he wrote.12

The projections showed the financial toll of storms along the East Coast and Gulf of Mexico increasing by 11 to 27 percent in the next decade and a half, “representing an additional $3 billion to $7 billion in average annual damage.” Similar damage is expected across the U.S., from declining crop yields in the Midwest to limited outdoor working hours in the South.13

Worldwide, the toll is staggering. A recent report out of Stanford University and UC Berkeley found that the warming effects of climate change could cause a 23-percent drop in global income by the end of the century14, without intervention or adapting the way our societies operate—from business strategies to political action.

To keep global warming from exceeding the critical threshold of 2° Celsius that all but guarantees those consequences15, the United Nations has brought together more than 40,000 participants in Paris this month for one of the largest climate conferences ever organized, including global, political and business leaders16.




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  • Engineered and Built Environment
  • Technology
  • Ecosystem
  • Social Services

Coastal protection & Flood Levees: “Due to sea level rise projected throughout the 21st century and beyond, coastal systems and low-lying areas will increasingly experience adverse impacts such as submergence, coastal flooding, and coastal erosion.”

Coastal protection & Flood Levees: “Due to sea level rise projected throughout the 21st century and beyond, coastal systems and low-lying areas will increasingly experience adverse impacts such as submergence, coastal flooding, and coastal erosion.”

New crop varieties, genetic techniques, efficient irrigation: “For the major crops (wheat, rice, and maize) in tropical and temperate regions, climate change without adaptation is projected to negatively impact production for local temperature increases of 2°C or more above late-20th-century levels, although individual locations may benefit.”

Afforestation and reforestation can create natural storage for CO2 to further loss to the atmosphere. Meanwhile, green infrastructure can limit CO2 emissions.

Social safety nets and food banks: Climate-related hazards affect poor people’s lives directly through impacts on livelihoods or destruction of homes and indirectly through, for example, increased food prices and food insecurity.

Reduction in GHG Emissions

  • Energy Supply
  • Energy Demand
  • Carbon Pricing
  • Energy Storage

Alternative Energy Sources: Renewable wind and solar power provide the fastest growth low-carbon alternatives to powering our energy-intensive society.

Supply-Side Fuel Switch: Gas is on track to replace coal as the top electricity generation source by 2030. Strong growth is expected for wind and solar even though policy uncertainty has delayed renewable deployments.

Energy Efficiency & Conservation: In addition to lower-carbon sources of energy, we need to deliver more services for the same energy input or the same services with less energy. In order to achieve the 2 degrees scenario: (1) Energy use in industrial sectors needs to be cut by 13% by 2025 (2) Growth of final energy consumption in buildings (currently ~1.5%) should not exceed 0.7% per year through 2025.

Alternative Fuel Vehicles: Sector growth is below expectation as major auto makers are pulling back investment in electric vehicles; however, battery cost is expected to drop significantly, and progress is expected around range/charging issues.

Carbon Pricing: Carbon pricing serves as a market mechanism to reduce CO2 emissions and can take two forms: (1) Carbon Tax (2) Permits/Allowances

Energy Storage: Renewables are intermittent and unstable, posing significant challenge for grid integration. Energy storage can help smooth out energy supply thus increasing the commerciality of renewable energy.

Capacity Increase of Carbon Sinks

  • Carbon Capture and Storage (CCS)

Carbon Capture and Storage (CCS): CCS captures CO2 pre- or post-combustion and then transports it through pipelines to geological reserves to be stored deep underground. There is the potential to deliver 13% of total emission reductions through technology by 2050, though it is still prohibitively costly.

The conference aims to create a universal, legally binding agreement on climate change, with 26 countries and territories having already submitted target goals for curbing greenhouse gas emissions—almost all by 203017.

At the same time, an alliance of corporations known as the We Mean Business Coalition is advocating businesses to adopt sustainable practices in kind. From Ikea to Sony to Coca-Cola, the coalition has organized more than 400 businesses to commit to sustainability on top of whatever regulations are enacted by governments worldwide18. Between adopting science-based emission reductions targets and increasing reliance on wind, solar, and other renewable energy sources, they’re aiming to be a driving force toward a carbon-neutral future.

Far from being a purely altruistic cause, these businesses have joined the fight against global warming because recent studies have revealed that sustainability aligns the world’s long-term future with their own self-interest. After Morgan Stanley’s Institute for Sustainable Investing analyzed the performance of over 10,000 open-end mutual funds and 2,000 Separately Managed Accounts (SMAs) over seven years, the firm “ultimately found that investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is on both an absolute and a risk-adjusted basis, across asset classes and over time.”19


These sorts of results make it no surprise that five out of the top 10 companies in the S&P 100 index identified climate change as a risk factor in their 2014 10ks, according to a Morgan Stanley Equity Research report, “Addressing Climate Change and the Investment Implications.”20

So what can investors do to align their portfolios with sustainable businesses?

The simplest way—pioneered by American universities in the apartheid era—would be divestment: avoid investing in the least sustainable companies that are contributing to climate change and the economic damage that comes with it. More than 400 institutions across 43 countries representing $2.6 trillion in assets have already committed to this divestment strategy.21

Yet avoiding obviously unsustainable companies is just part of the assessment investors ought to consider, and may not be the most strategic approach an investor can take. The harder and more opportunity-laden questions they have to answer are where to invest instead and how exposed their investments are to climate risks.

According to Bloomberg Business, investors with nearly $800 billion in assets have agreed to shift money into more climate-friendly investments such as wind and solar energy23. With more and more investors focusing on ESG (Environmental, Social and Governance) goals, green bonds are also becoming an attractive option for those looking to move money away from fossil fuels and yet still potentially reap similar returns from the market.

According to international law firm Morrison Foerster, green bonds are “thought of as a debt security,” the proceeds of which “have been earmarked for use in special projects that advance environmentally-friendly objectives” such as renewable energy and climate-friendly projects24. In 2013, nearly $11 billion worth of green bonds were issued. Just a year later, according to HSBC, that number tripled to over $36 billion.25

Whether through green bonds or other products, investors have a number of new options for moving their portfolios away from what they deem to be high-risk industries from an ESG goals perspective and toward sustainable and forward-thinking industries at home and abroad.


These sustainable investment approaches are only going to grow in number and size in the coming years, according to Chris Geczy, adjunct finance professor and academic director of the Wharton Wealth Management Initiative26. What that suggests is that investors worldwide are beginning to buy into the emerging research—that you don’t sacrifice return potential by integrating ESG. Put another way, the research shows that you can do good for the planet’s future while also doing well for yourself.

“It’s not a question of whether to adopt” a sustainable investment strategy, Geczy said, “but how to adopt and how much27.”

And those who act decisively and early, with a deliberate analysis of their investments’ exposure to climate risk, are likely to see the greatest benefit from changes in patterns of investment in sectors most exposed to climate change.

This material has been prepared for informational purposes only and is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley Smith Barney LLC and Morgan Stanley & Co. LLC (collectively, “Morgan Stanley”), Members SIPC, recommend that recipients should determine, in consultation with their own investment, legal, tax, regulatory and accounting advisors, the economic risks and merits, as well as the legal, tax, regulatory and accounting characteristics and consequences, of the transaction. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

This material contains forward looking statements and there can be no guarantee that they will come to pass. Information contained herein is based on data from multiple sources and Morgan Stanley makes no representation as to the accuracy or completeness of data from sources outside of Morgan Stanley. References to third parties contained herein should not be considered a solicitation on behalf of or an endorsement of those entities by Morgan Stanley.

Past performance is not a guarantee of future results.

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

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

Investors should carefully consider the investment objectives and risks as well as charges and expenses of a mutual fund before investing. To obtain a prospectus, contact your Financial Advisor or visit the fund company’s website. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.© 2015 Morgan Stanley & Co LLC. Member SIPC. All rights reserved.

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