You can seek to generate positive financial returns while benefiting the environment. Here are some different ways to approach that transition.
Submitted by Morgan Stanley
Originally published on Morgan Stanley Insights
By Lily Trager
Wealth Management, Head of Investing with Impact
Just as reducing your own carbon footprint may not be as easy or straightforward as you would like, building a green portfolio can take time and patience. There are a range of approaches you can take to generate potential positive financial returns while benefiting the environment.
The market for investments that help transition to a low carbon economy continues to gain momentum. This is helped in part by the continuing increase of renewables as a percentage of the global energy mix. In fact, our own research team estimates that 40% of the global energy mix will be made up of renewable and alternative energy by 2030. Given this background, it’s important to consider the different ways to build a green portfolio. To get started, here are a few decisions you need to make.
1. What is your focus? Do you want to eliminate fossil fuels from your portfolio completely, invest in companies in any industry that have embraced positive environmental practices, or invest directly in firms that seek to find solutions or mitigate the effects of climate change—or all of the above? At Morgan Stanley we take a customized approach with clients to find the right fit for their portfolio and goals.
2. Do you want to start with just a portion of your portfolio or convert the whole thing? For example, you could start by replacing a traditional fixed income mutual fund with a fossil fuel-free bond fund or a labelled “green bond” fund investing in renewable energy projects. If you’re ready to go all-in, we can help you devise a plan to align your entire portfolio with environmental goals.
3. How will you implement these changes? It is often best to make changes to your existing portfolio over a period of time alongside a trusted Financial Advisor so together you can account for taxes, market fluctuations and your other investment goals. In general, decarbonization of your portfolio is a long-term investment philosophy, not something you can do in one quarter.
At Morgan Stanley, we typically take a very client-driven approach. We have more than 195 investment opportunities available on our Investing with Impact Platform that can serve clients, including individual investors with just a few thousand dollars to invest as well as large institutional investors.
The platform, which launched in 2012, has more than $66 billion in client assets under management.
A Custom Approach
Depending on the client, you can work with our Financial Advisors to create custom portfolios using a range of investment products, including third-party separately-managed accounts, exchange-traded funds and mutual funds. We can screen your existing portfolio to help you avoid objectionable sectors or geographies or highlight which of your existing holdings have the strongest environmental profiles. You can also purchase a basket of stocks that address global sustainability themes, including climate change, health and wellbeing, waste management, water scarcity and safety and security.
We typically utilize research from third-party firms combined with our own in-house due diligence processes and manager scoring tools to help identify the best companies, funds, and partners to work to achieve your climate goals.
We want to make sure that you are committing money to investments with positive environmental impact, not just companies and funds that are marketing themselves that way. But we recognize that not all companies are perfect and many may be in the process of improving their track record on environmental issues. That’s why our analysts spend a lot of time on due diligence.
If you have fewer assets to devote to this theme, we also offer a Climate Action theme portfolio on our automated investment platform, Morgan Stanley Access Investing (which has a $5,000 minimum). Through our Access Investing platform, you can align your investments with your values, opt for an impact-driven strategy that seeks to maximize returns, or focus on minimizing fees.
It’s a core investing principle at Morgan Stanley that portfolios should be diversified. One way to achieve that is to broaden your focus beyond just climate issues to encompass sustainable goals, which include environmental, social and corporate governance (ESG) criteria, which we believe are interrelated issues.
For example, an investment in affordable housing that is being renovated with solar panels can help the environment and achieve goals around social justice.
Creating a green portfolio is not simple, but it can be rewarding. The most important step is the first one—deciding to take action. Climate change is a complex, global problem, but its effects can be mitigated and solutions achieved. An investment portfolio, no matter the size, can have a positive impact. Connect with a Morgan Stanley Financial Advisor to start building a portfolio that’s fit for you and your unique goals.
Morgan Stanley is a global financial services firm and a market leader in investment banking, securities, investment management and wealth management services. With more than 1,200 offices in 42 countries, the people of Morgan Stanley are dedicated to providing our clients the finest thinking, products and services to help them achieve even the most challenging goals. Through its Global Sustainable Finance Group, Morgan Stanley seeks to support community development initiatives with debt, equity, and philanthropy.
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