Scaling Up Sustainable Finance: From Strategy to Solutions

At Morgan Stanley’s Sustainable Finance Summit, companies and investors highlighted the clean energy transition as one of the most compelling and complex business opportunities in today’s markets and shared their business strategy and investing outlooks. Market participants such as investment managers and corporates are aligned on the view that transitioning to a low-carbon economy can drive shareholder value, as companies attempt to benefit from government incentives, respond to regulatory mandates and scale solutions that offer lower costs and financial benefits for investors and consumers. Investors are in search of the energy transition’s winners and corporates are focused on using data and technology to drive decarbonization initiatives.

“At Morgan Stanley, we are committed to using our resources as a financial institution to help address the climate and inequality crises because it is our strong desire to be a major impetus behind creating a more sustainable future,” said Melissa James, Vice Chairman of Global Capital Markets at Morgan Stanley.

Sustainability-focused business units from across the firm hosted the four-day event, where corporates, investment managers and allocators shared their views on an array of environmental, social and governance (ESG) topics and the impact to financial returns. The Summit’s more than 500 attendees, including representatives from 30 public companies, discussed:

• the challenges impeding the transition to clean energy
• how technologies such as artificial intelligence and data analytics can help to achieve ESG goals and
• the benefits of new laws and regulations, particularly the U.S. Inflation Reduction Act (IRA).

“Bringing together like-minded individuals who view the financial impact of ESG through different lenses was a unique way to drive conversation,” said Tracy Castle-Newman, Global Head of Client Business Development and Strategy in the Institutional Equity Division at Morgan Stanley. “Corporates believe this will drive shareholder value. Investment managers believe that the transition of corporates will create positive investment outcomes. Allocators are looking to invest in funds that have an ESG mandate, but also deliver returns.”

Opportunities in the Clean Energy Transition

The relatively low cost of renewable energy is driving up demand and helping facilitate the transition from fossil fuels—coal, oil and natural gas—to clean energy sources. However, a combination of more extreme weather conditions and the growing share of power from intermittent renewable power sources present challenges to power grid reliability. Panelists at the Summit discussed opportunities in various global regions for corporates, including technology companies, developers and equipment manufacturers—and for investors to identify the winners—that can help solve the biggest challenges of the clean energy transition.

One clean energy solution that helps provide steady power is lithium-ion batteries, which store energy and are used in everything from electric vehicles to laptops and smartphones. As more companies seek cheaper, reliable and low-carbon energy, and as the demand for EVs grows, investors are assessing companies that manufacture or use lithium-ion batteries and monitoring the limited accessibility of lithium and other raw materials. Emerging energy storage technologies, such as iron-air and solid-state batteries, could play an important role in ensuring power grid reliability.

Fuel cells, which can generate electricity from a number of fuel sources, including clean hydrogen, are another decarbonizing tool that can help ensure the transition to clean energy occurs without sacrificing power grid reliability. As investors assess the landscape for fuel cell makers, they are considering companies’ carbon footprints, related technologies and energy efficiency. Both energy efficiency and carbon footprints vary depending on how fuel cells are powered. Emissions levels from fuel cells vary depending on whether the hydrogen is green (produced from renewables), blue (produced from natural gas and heated water), or brown/black (produced from fossil fuels).

“It is exciting to see the rapid pace of technology development, and cost reduction, in a wide range of products that can help ensure the transition to a lower-carbon economy without incurring higher costs or sacrificing grid reliability,” said Stephen Byrd, Head of Global Sustainability Research at Morgan Stanley. “We continue to focus our ESG efforts on ‘Rate of Change’ companies that can achieve both improved financial results and improved ESG metrics—and the underlying improvement in clean energy technologies is a core element of this ‘Rate of Change’ dynamic.”

AI and Data Analytics for ESG

Corporate leaders at the Summit spoke about the potential for AI, such as machine learning and data analytics, to better measure ESG metrics and help achieve sustainability goals in their business practices and supply chains. For example, an airline might want to optimize the fuel burn for its fleet, or a technology company might want to create a data model to help report and reduce its emissions.

Another example of leveraging analytics in achieving sustainability goals that was highlighted at the conference was the use of technology that allows companies to collect data from different parts of the supply chain and track the movement of goods. This traceability and visibility help companies reduce their association with controversial activities, including scope 3 greenhouse gas emissions (indirect emissions in the value chain of an organization), human rights violations or illegal deforestation. Investors, including venture capital and private equity firms, are likely to pay a premium for companies whose software can deliver transparency and capture value.

“With better data, businesses can set meaningful sustainability targets, monitor progress and continuously improve their performance,” said Jessica Alsford, Morgan Stanley Chief Sustainability Officer and CEO of the Institute for Sustainable Investing. “For a firm like Morgan Stanley, that is important for both our own operations and for helping our clients identify opportunities for innovation and impact.”

Regulatory Boosts

One area of opportunity that conference participants spoke about was the 2022 U.S. Inflation Reduction Act, which provides tax credits for producing renewable energy, as well as funding for investments in energy efficiency and research and development that can help reduce greenhouse gas emissions. Many of the panelists agreed that the IRA creates an environment to capitalize on new financial opportunities, but some speakers noted significant bottlenecks, including the time it takes to connect renewable energy sources to the grid for consumption. Integrating clean energy into the grid effectively will require large-scale fixes, such as building the massive amount of power lines required to transport renewable energy from where it is produced to where it will be used, to meet the increasing demand for more electricity as part of the global energy mix.

The Summit speakers also referenced the growing number of sustainability reporting regulations since 2021,¹ and how the improving quality of ESG disclosures, whether voluntary or government-mandated, can help companies attract investments and reduce risk. Some panelists likened the current state of sustainability-disclosures regulation to the stock market right before the Securities Act of 1933, which was created to protect investors and ensure more transparency in financial statements after the stock market crash of 1929. They underscored the ongoing challenge of accurately tracking and disclosing scope 3 greenhouse gas emissions, which account for 70% of the average company’s carbon footprint,² and that working toward reliable and internationally accepted standards for scope 3 carbon accounting methodology will be crucial to achieving net-zero.

Social Issues at the Forefront of Corporate Strategies

In addition to identifying opportunities from the energy transition, Summit panelists underscored corporates’ focus on diversity, equity and inclusion (DEI) practices in the pursuit of better business outcomes. In healthcare, for example, some pharmaceutical companies are seeking to increase diversity in clinical trials to help improve drug development and efficacy for a wider pool of people, while some education companies promote equity for underrepresented minorities in healthcare professions to address social determinants of health.

Beyond healthcare diversity, equitable housing was another important DEI topic at the Summit. One of the biggest obstacles facing potential homeowners is insufficient credit, and various players in the housing ecosystem are working to provide solutions to this, by improving access to mortgage approvals, for instance. New programs are helping renters build credit and improve credit scores by facilitating multifamily borrowers to report timely rent payments, which is not typically factored into establishing credit history.

Investors, meanwhile, are assessing the housing ecosystem, not only for operating performance but for DEI initiatives that can impact bottom lines. “As an investor in the ecosystem around homes, we’re looking at the DEI of lenders, brokerage houses, landlords and homebuilders,” said Brendan McCarthy, Head of Real Estate at Calvert within Morgan Stanley Investment Management. “What are the policies and programs in place to attract diverse talent? Are they representing their customer base and how are they attracting future demand?”