Investors may be overlooking attractive and impactful climate-related investments because of false beliefs that opportunities are more limited than they are.
Investors have come to terms with the reality that climate change is no longer a theoretical threat. The effects of extreme weather, rising sea levels, resource scarcity and pollution are rippling across every continent with dire consequences for individuals, governments and businesses.
Yet, climate investing is still burdened by many preconceptions and myths, according to Morgan Stanley Investment Management’s Vikram Raju, Head of Impact Investing for Alternative Investment Partners Private Markets, which manages US$11.2 billion in partnership investments, limited partnership secondaries, co-investments and impact investing strategies.
Many investors may be overlooking opportunities that can meaningfully address a range of climate issues—and potentially deliver compelling risk-adjusted returns, Raju says.
Here are the six biggest myths about climate investing, according to Raju:
For many, global warming evokes images of melting icebergs in the Arctic Circle, but there are aspects of the climate issue that are more mundane and tangible:
Pollution: From smog-choked Beijing and New Delhi to leafy London, where nitrogen oxide levels routinely exceed safe norms, air-quality issues can be all too visible in our daily lives.
Resource Scarcity: Drought is a growing problem that affects communities and farmers around the world. Lakes in many parts of Africa, for example, are shrinking, leading to social conflict, mass migration and refugee crises.
Waste Management: Many of our cities are running out of landfill and other solutions to dispose of waste. An increasing amount of the plastics that make up that waste flows into the oceans, contaminating marine life and our food chain at alarming levels.
Eco-diversity: Pristine stretches of natural environments home to the planet’s most biodiverse ecosystems are threatened, from rainforests in Southeast Asia and South America routinely razed for agriculture and timber to remote wildlife refuges being opened for commodities exploration.
ESG, or the incorporation of environmental, social and governance risk factors, is increasingly becoming a core part of any investment strategy.
Creating positive climate impact, however, requires more than ESG hygiene. It involves actively investing in businesses, typically putting primary capital to work in a private equity context, where core business activities create new positive effects on the environment, be it a reduction in CO2 emission, pollution or resource consumption.
Renewables have historically been a cornerstone of climate investing—but there’s a world of opportunity beyond windmills and solar panels:
Transportation: Minimising the carbon impact of transportation isn’t just about funding electric cars. A myriad of companies, from battery-swapping services to electric vehicle charging-station software, contribute to eco-friendly transportation in a less visible way.
Everyday consumption: Green chemistry doesn’t get the same attention as alternative energy but offers ample room for reducing the use of fossil fuel derivatives in items ranging from packaging materials to paints and furniture polish. The same is true of new business models around recycling, compostable packaging materials, waste-to-energy generation and waste-water processing.
Food: Demand for meat protein is growing, along with the world’s population and income levels. Yet, livestock is a major source of emission of the greenhouse gas methane—which is approximately 30 times worse than CO2. Alternatives such as sustainable seafood that are far more carbon-friendly sources of protein could be impactful to both the environment and food markets.
The cost of generating renewable energy has declined massively and pricing is now competitive with traditional energy in many markets. It was once the case that renewables thrived and died on subsidies, but three major changes have made this idea antiquated:
Improved technology: It’s now feasible to deploy renewable energy in very small spaces or across remote geographies. Solar panel prices have declined by more than 60% over the past decade.1
Varying prices: Markets are not monolithic; energy prices, along with solar and wind resources, vary within regions. This makes renewables very competitive in some places and less so in others, and investors can target specific projects.
Rising demand: In switching out kerosene or diesel for solar power, consumers are saving money, helping to improve air quality in their communities and tapping into a more reliable and sustainable source of power. Ageing grid infrastructure in developed markets and the absence of grids in many emerging markets is also driving demand.
Like other areas of early-stage investing, clean technology has experienced a few boom-bust cycles, with some high-profile successes and failures. A lot of the early attention has focused on grand, over-arching solutions, yet a number of low-profile projects may prove more realistic and promising. For example, instead of chasing the silver bullet for desalination at scale, savvy investors are looking at software that regulates water-system pumps for filtration.
Consider the U.S. While the federal government has taken a different direction on climate initiatives, individual states and cities are rolling out ambitious plans of their own. In March, New Mexico joined California, Hawaii and the District of Columbia in setting a goal for all renewable and carbon-free electricity by 2045.2 Meanwhile many states in the South and Southwest have gotten behind the boom in solar and wind energy production.
A comprehensive climate strategy encompasses ideas big and small. It can address the broader threat of global warming and support grassroots initiatives that seek to solve problems related to pollution, resource scarcity, waste management and eco-diversity. Investors, in turn, could achieve meaningful returns and make a real impact in addressing the most pressing issues facing our planet.
For more on the climate investing, speak to your Morgan Stanley financial adviser or representative. Plus, more Ideas from Morgan Stanley's thought leaders.
1 EnergySage, How solar panel cost and efficiency have changed over time, https://news.energysage.com/solar-panel-efficiency-cost-over-time/
2 AP News 7/17/2019, Inslee signs mandate for carbon-free electricity by 2045.