Sustainable investing: ten-year outlook | Morgan Stanley (2024)

When Morgan Stanley startedInstitute for Sustainable InvestmentsTo accelerate the growth and adoption of sustainable finance, few market participants understood its importance to the environment, society and business results. Today, as the institute celebrates its 10th anniversary^eanniversary, sustainability is reshaping investments: assets under management (AUM) for sustainable equity and bond funds reached a record 7.9% of global total assets under management in the first half of 2023.

But the need for even more large-scale capital to finance innovative sustainability solutions is clear as companies race towards a net-zero energy transition and demand grows to finance complementary and interconnected issues important to the global economy, e.g.gender equalityofmarine conservation.

Over the next decade, investors and companies will need to tackle the increasingly complex sustainable finance landscape to make informed decisions, mitigate risks and seize new investment opportunities.“Navigating the Next Decade: 10 Demand Signals for the Next 10 Years of Sustainable Finance,”the institute's latest report highlights many of these trends, including:

• the growing diversity of sustainable investment products and strategies;
• increasing demand for land, minerals and new technologies to facilitate the transition to net zero;
• increasing global government regulations that will impact corporate playbooks, disclosures and data.

The diversity of sustainable investment strategies must be expanded.

Demand from millennial investors – combined with new government incentives and regulations – is likely to drive the presence of sustainable investing in new asset classes and themes over the next decade. According to a 2021 report from the institute, nearly all U.S. millennials surveyed (99%) said they were interested in sustainable investing. If the demographic continues its intention to invest, a greater range of solutions will likely enter the market.

At the same time, sustainable investment opportunities are likely to expand from public markets to other areas, such as private equity. Private equity investors can look for growth opportunities from sustainable brands, which 62% of younger generations in the US say they prefer to buy from.¹as companies can pursue efficiencies in energy, inputs and materials, as well as potential acquisitions of sustainability-oriented companies.

Finally, investors can expect increasing interest in themes other than climate action. These includenature and biodiversity, transition finance (which finances companies' transition to net zero) and inclusive finance (which provides finance to underrepresented people and local communities). Social issues should also remain prominent on investors' agendas, with increasing attention being paid to issues such as privacy and the ethical implications ofartificial intelligence; race, gender andLGBTQ+diversity; accessaffordable housing, healthcare and education; and the disproportionate social impacts of physical climate events and the disproportionate social impacts of physical climate events.

The transition to net zero will require a change in approach to land use.

The race to decarbonize and achieve key interim targets for 2030 is on. Companies will have to reorient their business models and business practices, while long-term investors will have to decide how to deploy their capital to meet global climate goals.

An area of ​​focus will be ensuring productive and efficient land use with increasing demand for renewable energy and conservation efforts. Hydropower and some types of solar energy can require up to twice as much land as coal and up to thirty times as much as gas. The amount of land used worldwide for electricity production could increase by 60%.²As competition for land increases, companies across all sectors will need to ensure they use land sustainably. To ensure positive long-term climate outcomes, land use must include reforestation and afforestation, planting trees in areas that were previously not forested; landscape restoration; and protection of biodiversity.

Meanwhile, demand for metals and minerals such as copper, lithium, nickel, cobalt, graphite, zinc and rare earths will increase as demand for renewable energy grows andproduction of electric carsis increasing, as a typical electric vehicle requires almost six times more mineral input than a conventional vehicle. Estimates suggest that demand for these minerals could increase two to six times by 2040.³creating a struggle for access to limited sources of these important raw materials. The rapid growth in demand could lead to shortages of key minerals and metals unless companies increase investment in mining exploration and production. The Energy Transitions Commission estimates that companies would need to invest $70 billion per year through 2030 to expand supply, but annual capital investment has averaged just $45 billion over the past two decades.⁴In addition, it will be important to ensure that these resources are sustainably sourced with appropriate environmental and social standards to limit negative impacts on the physical environment and local communities.

ESG regulation will have far-reaching consequences for companies and investors.

Companies can expect to navigate an increasingly complex web of regulations and policies aimed at driving the transition to a net-zero global economy. One of these, which will come into effect as early as 2024, is the EU Corporate Sustainability Reporting Directive, which obliges more than 50,000 companies worldwide to disclose various ESG factors.⁵Regulation will reshape the business playbook and ensure that sustainability becomes a fundamental part of business strategy, operating models and financing plans.

For investors, more robust ESG disclosure from companies means bringing specific and standardized information into the public domain for use in evaluating a company's sustainability performance, including in areas such as revenue, business practices and supply chains. ESG data is also likely to improve significantly when modeling techniques are usedartificial intelligenceapplied to the room.

These developments are likely to require more sustainability-oriented financial professionals at companies and in the investment community. Demand for sustainability skills in the financial sector has soared, with a notable 17% increase in hiring between 2021 and 2022 in the US and EU.⁶But there is still a critical talent gap, and in some cases companies are already starting to pay talent premiums for people with ESG and sustainability skills.

In search of a sustainable future

While companies and investors understand that making the global economy more sustainable and inclusive will be a priority over the next decade, it will not be an easy road. All stakeholders will need to work together to find appropriate ways to achieve thisfinance the transitionin a way that takes into account the complex interdependencies of many important environmental and social issues. For an even deeper dive, see the institute'sthe reportto help identify areas of progress, what work remains to be done, and how stakeholders can come together to overcome obstacles to a sustainable and economically sound future.