MSCI Thematic InsightMay 2024

Leveraging Environmental
Opportunities for a Resilient Future
How Can Investors Spot the Leaders and Laggards?

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MSCI THEMATIC INSIGHT
LEVERAGING ENVIRONMENTALOPPORTUNITIES FOR A RESILIENT FUTURE

Executive Summary

Confluence of factors
driving greater interest inenvironmental solutions

Identifying environmental
opportunity themes

Selecting environmental
opportunity themes
positioned for significant
growth tailwinds

Scale of potential
adoption

Nature of potential
disruption

Conclusion

Contents
This is an interactive brochure

Executive Summary

Confluence of factors
driving greater interest inenvironmental solutions

Identifying environmental
opportunity themes

Selecting environmental
opportunity themes positioned
for significant growth tailwinds

Scale of potential adoption

Nature of potential
disruption

Conclusion

03

MSCI THEMATIC INSIGHT
LEVERAGING ENVIRONMENTALOPPORTUNITIES FOR A RESILIENT FUTURE

Executive Summary

Executive
Summary
Environmental solutions are expected to play a critical role inbuilding a more resilient future by reducing the likelihood ofcrossing irreversible environmental tipping points. While thefocus of governments on mitigating the impact ofenvironmental breakdown has created opportunities forinvestors, they may face two immediate challenges:
identifying the full opportunity set and, differentiating
business activities likely to experience significant growth
tailwinds with potential for mass adoption.
In this paper, we identify a set of eight environmental
opportunity themes (clean energy, energy efficiency, othermitigation, adaptation, sustainable water, pollution
prevention and control, recycling, biodiversity andecosytems) for investors to consider. Then, we discuss two
analytical dimensions, the scale of potential adoption andthe nature of potential disruption, which can help investors
understand the strength of growth tailwinds supporting agiven environmental opportunity. These two analyticaldimensions may help investors in differentiating potential
leader companies, which are exposed to significant growth
tailwinds due to environmental sustainability considerations,from laggard companies which may be exposed to relatively
weaker growth tailwinds.

Confluence of factors
driving greater interest inenvironmental solutions

Identifying environmental
opportunity themes

Selecting environmental
opportunity themes
positioned for significant
growth tailwinds

Scale of potential
adoption

Nature of potential
disruption

Conclusion

04

MSCI THEMATIC INSIGHT
LEVERAGING ENVIRONMENTALOPPORTUNITIES FOR A RESILIENT FUTURE

Executive Summary

Confluenceof factors
driving greaterinterest inenvironmental
solutions
Investors and governments are seeking to increase sustainability
across the global economy and change how conventional
methods of extraction and consumption have underpinned
economic growth since industrialization.1 Environmental
solutions are expected to play a critical role in achieving thistransition towards a more sustainable global economy and inbuilding a more resilient future by reducing our likelihood ofcrossing irreversible environmental “tipping points,” such as
significant climate change, groundwater depletion or biodiversity
loss. Environmental solutions include products, services orprocesses that minimize environmental damage by improving
energy and material efficiency, developing more renewableenergy capacity, reducing reliance on natural resources, andpreventing pollution.
A targeted focus by governments on mitigating the worst
possible impact of environmental breakdown has unlocked aseries of policy measures to support the uptake of these

Confluence of factors
driving greater interest inenvironmental solutions

Identifying environmental
opportunity themes

Exhibit 1:
Cost and adoption trend
for select environmental
opportunities

Scale of potential
adoption

Selecting environmental
opportunity themes
positioned for significant
growth tailwinds

Nature of potential
disruption

Capacity increase (x times), 2010-2020

Batteries for passenger
electric vehicles

100

Source: Inferred from the figure
SPM.3 on page 16 of “Mitigationof Climate Change: Summary for
Policymakers” report by the IPCC’s
6th Assessment Report Working
Group 3. For power generation
technologies (concentrated solar
power, offshore wind, onshore wind,
and photovoltaics), cost reduction
is based on 2020 USD per MWhwhereas capacity increase refers toincrease in Gigawatts (GW) capacity.
For batteries for passenger electricvehicles, cost reduction is based on2020 USD per kWh whereas capacity
increase refers to increase in number(in millions) of electric vehicles.
https://www.ipcc.ch/report/ar6/
wg3/downloads/report/IPCC_AR6_
WGIII_SPM.pdf

Conclusion

50

Photovoltaics
Offshore wind

10

Concentrated solar power
5

Onshore wind

0
40%

50%

60%

70%

80%

90%

100%

Unit cost reduction % (2010-2020)

solutions. Environment-friendly industrial policies andfinancing options, such as the European Union’s (EU)
LIFE program,² the Inflation Reduction Act,³ the European
Green Deal4 and the Net-Zero Industry Act,5 may enhance
the commercial viability of projects involving
environmental solutions. This could further drive down
their cost (Exhibit 1) and thereby may accelerate
investment flows and broaden their adoption.
We have already seen a wave of new opportunities and asurge of technological innovation resulting from thistransition with environmental solutions, as a broader

category, projected to attract USD 5-10 trillion in
investments per year by 2025.6 As capital flows toward
environmental solutions, key questions for investors are:ll

How can I identify companies that provide
environmental solutions?
Within this broad opportunity set, how can I pick asubset of themes associated with significant growth
tailwinds7 due to their potential for mass disruption
and adoption driven by environmental sustainability
considerations?

1		

Global investors shift focus to sustainability amid push for a green
recovery (worldbank.org); Four steps towards a more sustainableglobal economy | United Nations; COP26: Together for our planet |United Nations

2		

LIFE - European Commission (europa.eu)

3“Inflation Reduction Act of 2022.” Public Law No: 117-169, Aug. 16, 2022.

4		

The European Green Deal - European Commission (europa.eu)

5		“Net Zero Industry Act.” European Commission, March 16, 2023.

6		

Green tech investment could reach $5 trillion by 2025 | GPI (globalpi.
org) ; Green business opportunities and net zero | McKinsey

7		

In this paper, we discuss growth tailwinds or growth opportunity driven
by environmental sustainability considerations only. Investors may
wish to consider other risks and opportunities.

Confluence of factors
driving greater interest inenvironmental solutions

Executive Summary

Identifying
environmental
opportunity
themes
To identify themes with opportunities for positiveenvironmental contributions, we looked at MSCI ESG
Research’s Environmental Impact themes8 and publicly
available taxonomies and frameworks developed by the
EU and the United Nations Environment Program (UNEP).9
After understanding the commonalities and differencesamong these, we have proposed environmental
opportunities themes (Exhibit 2) to help investors broadly
identify business activities with potential for positiveenvironmental contributions through mitigating
greenhouse gas emissions, adapting to new climactic
patterns or helping reduce adverse impacts on natural
capital. It also allows investors to focus on specificenvironmental opportunity trends by carving out a subsetof themes such as clean energy and sustainable water.

8	
MSCI Sustainable Impact Metrics Factsheet
9	EU taxonomy for sustainable activities (europa.eu), Definitions and Concepts:
Background Note (unep.org)

Identifying
environmental
opportunity themes

Scale of potential
adoption

Selecting environmental
opportunity themes
positioned for significant
growth tailwinds

Nature of potential
disruption

Exhibit 2:
Environmental opportunity themes
Source: MSCI, Based on the EU Taxonomy {TEG final report on the EU taxonomy (europa.eu}, UNEP, and MSCI ESG Research’s Environmental Impact Categories

Environmental
Opportunities

Climate Change
Mitigation

Clean
EnergyExamples ofEnvironmental
Opportunities

MSCI THEMATIC INSIGHT
LEVERAGING ENVIRONMENTALOPPORTUNITIES FOR A RESILIENT FUTURE

Alternative
energyHydro power
Nuclear power
Batteries
Hydrogen

Climate Change
Adaptation

EnergyEfficiency

Other
Mitigation

Smart grids

Meatalternatives

Ground source
heat pumps
Hydrogeninfrastructure
Next generation
batteries

Methanecapture andabatement

Natural Capital

Sustainable
Water

Drought
Resistant
Seeds

Efficient
irrigation
systems

Weather
Forecasting

Desalination

Carbon capture& storage (CCS)

Pollution
Prevention& Control

Recycling

Biodiversity& Ecosystem

Waste
treatment

Recyclingsolutions

Low toxicity/
VOC
solutions

Recyclingalternatives

Naturalorganic
agriculturalchemicals
Environmental
remediation

Clean Energy Opportunities
Themes05

Low-carbon Opportunities
Climate Opportunities
Environmental Opportunities

Sustainable
Water

Natural Capital Protection

Conclusion

06

MSCI THEMATIC INSIGHT
LEVERAGING ENVIRONMENTALOPPORTUNITIES FOR A RESILIENT FUTURE

Confluence of factors
driving greater interest inenvironmental solutions

Executive Summary

Identifying environmental
opportunity themes

Selecting environmental
opportunity themes positioned
for significant growth tailwinds
While the above themes (Exhibit 2) offer a starting point forinvestors aiming to capitalize on subset of themes likely toexperience significant growth tailwinds driven byenvironmental sustainability considerations, simply relying on
an extensive list may have several pitfalls for them as not allenvironmental solutions may offer similar growth
opportunities. For example,lS ome technologies have already grown close to theirmarket saturation. For instance, LED lightbulbs may haveexperienced high growth in the past but could be near theirmarket saturation phase by now as their deployment
become widespread.10lS ome environmental solutions may not be positioned to
grow significantly if they are not aligned with broader
trends. For example, fossil fuel-based cogeneration is notaligned with the global goal of a zero-carbon world andthus, in a scenario of transition to a zero-carbon world, it
may not be positioned to grow at the same rate as that ofsolutions aligned with a zero-carbon world.

l inally, it is crucial for investors to distinguish between
Fsolution users and solution providers as they are exposed
to different sets of growth opportunities, though both are
generally considered by taxonomies as environmentally
sustainable economic activities.

To identify a subset of themes likely to experience significant
growth tailwinds and have high potential for mass disruption
and adoption, we discuss two main analytical dimensions
investors can adopt: one is defining the scale of potential
adoption the environmental solution could have in the real
economy; the other is determining the nature of potential
disruption the solution will bring to different sectors in thevalue chain. We go into detail on both questions below.
10

Must-Know Led Light Statistics [Recent Analysis] • Gitnux; Nearly half of U.S.
households use LED bulbs for all or most of their indoor lighting - U.S. Energy
Information Administration (EIA)

Selecting environmental
opportunity themes
positioned for significant
growth tailwinds

Scale of potential
adoption

Nature of potential
disruption

Conclusion

07

MSCI THEMATIC INSIGHT
LEVERAGING ENVIRONMENTALOPPORTUNITIES FOR A RESILIENT FUTURE

Executive Summary

Scale ofpotential
adoption
The first dimension — the scale of potential adoption — has two
main components. The first is how well a technology solves the
problem it was built to address. For example, solar PV, and windturbines, which don’t produce greenhouse gas emissions
through their operations, solve the problem of decarbonizing
electricity production extremely well (Exhibit 3). For these powersources, this is true both in an absolute sense and from an
opportunity cost perspective, where alternatives are highemitting options like combined cycle gas turbines (CCGT),
oil-fired generators and coal-fired plants. Also, considering
enabling technologies like high voltage transmission lines, utility
scale battery storage, and upgrades to the electricity grid to
deploy renewable energy can ensure investors capture
opportunities across the renewable power value chain. Similarly,
new agricultural technologies that are more natural resource
efficient and reduce pesticide use,11 for example, may have thepotential for widespread adoption as well.
The second component of the scale of potential adoption is theremaining runway for the technology’s room to grow. What is thesize of the total remaining addressable market? Some markets are
already saturated: The use of LED lightbulbs grew exponentiallyover the past two decades and the bulbs are now ubiquitous. They
solve their problem well — LED lightbulbs are much more energy
efficient than previously conventional alternatives — but large partof the market has already been addressed with remaining
addressable market shrinking every year.12

Confluence of factors
driving greater interest inenvironmental solutions

Identifying environmental
opportunity themes

Selecting environmental
opportunity themes
positioned for significant
growth tailwinds

Scale of potential
adoption

Nature of potential
disruption

Conclusion

Exhibit 3:
Relative mitigation potential and cost of selected climate solutions
Note: Low/Medium/High categorization for both axis is inferred from the figure SPM.7 on page 42 of the report “Mitigation of Climate Change: Summary for Policymakers” by the IPCC’s 6th Assessment Report
Working Group 3. “Mitigation potential” of a solution is based on its potential contribution to net greenhouse gas emissions reduction, as defined in the IPCC report, in terms of gigatons of carbon dioxide equivalent
per year by 2030 at all possible lifetime cost levels. Net lifetime cost categorization of a measure is based on the total cost profile, as provided in the IPCC report, associated with its full decarbonization potential,
which may include a distribution of implementation costs.

Net lifetime costHigh

MediumLow

Mitigation potential of different measures
Low•

Bioelectricity, Hydropower, Geothermal energy, Biofuels.

•

Carbon capture and storage.

•

Methane reduction in coal mining.

•

Methane and N2O reduction in agriculture.

•

New energy efficient buildings, Improvement of existingbuildings.

•

Industrial energy and material efficiency•

Feedstock decarbonization and cementitious material
substitution in industries.

•

Nuclear energy.

•

Reduce methane emissions in oil & gas sector and solid
waste management.

•

Shift to public transportation and bikes.

•

Efficient lighting, appliances, and equipment.

•

Fuel-efficient vehicles.

•

Shipping and aviation energy efficiency.

On its own, fast growth does not mean a small future market: technologies such as
solar PV, wind turbines, and electric batteries have seen widespread adoption
globally in the last decades (Exhibit 1) but growing energy demand and the large
amount of emissions-intensive electricity generation still in use13 suggest thesewidely used technologies still have significant room for growth.

MediumHigh•

Carbon sequestration inagriculture•

Reduced conversion offorests and other ecosystems•

Ecosystem restoration,afforestation and reforestation•

Fuel switching in industries•

Wind energy•

Solar energy

-

-

11		
UNDP-Cultiv@te-Finalists-Brochure-Jul2020-compressed.pdf ; 5 Tools and Technologies That Drive Sustainable
Agriculture – U.S. Farmers & Ranchers in Action (usfarmersandranchers.org)
12		
Must-Know Led Light Statistics [Recent Analysis] • Gitnux; Nearly half of U.S. households use LED bulbs for allor most of their indoor lighting - U.S. Energy Information Administration (EIA)
13		
Unabated fossil fuel-based electricity – Analysis - IEA

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MSCI THEMATIC INSIGHT
LEVERAGING ENVIRONMENTALOPPORTUNITIES FOR A RESILIENT FUTURE

Confluence of factors
driving greater interest inenvironmental solutions

Executive Summary

Identifying environmental
opportunity themes

Selecting environmental
opportunity themes
positioned for significant
growth tailwinds

Scale of potential
adoption

Nature ofpotential disruption
After the scale of potential impact, the second analyticaldimension is the nature of potential disruption thatenvironmental solutions will bring to different sectors in thevalue chain. For instance, a typical product value chain may
contain both providers and users of an environmental
solution, however these two entities in the value chain could
be exposed to different levels of growth opportunities.
To explain this, we refer to MSCI’s Low Carbon Transition
Categories which are defined based on the nature oftransition different companies are likely to experience in a low

carbon transition scenario (Exhibit 4). Here, solution users are
generally the businesses which currently have carbon
intensive operations or products (e.g., steel, cement, utilities
and automobiles), and thus may be undergoing operational or
product transition, as applicable, driven by climate
considerations. Such businesses may face headwinds in theform of carbon pricing risk in the low-carbon scenarios. In
contrast, solution providers such as wind turbine
manufacturers may face greater growth tailwinds due toincreased demand for their products and services in a low
carbon transition scenario (Exhibit 5).

In earlier research,14 we analyzed the earnings growth ofcompanies with different low-carbon-transition risk profiles.
We found that, over the study period,15 Solutions LCT
category, which includes low-carbon solutions providers, had
higher earnings growth compared to Asset Stranding,
Product Transition and Operational Transition LCT categories.
Classifying companies into provider and/or users of anenvironmental solution thus may help investors in identifying
companies likely to experience significant growth tailwinds.

Exhibit 4:
MSCI’s Low Carbon Transition Categories
Source: MSCI ESG Research

LCT Category

Description

Asset Stranding

Potential to experience stranding of physical or natural assets due to regulatory, market and technological forces arising from low- carbon transition.

Product Transition

Reduced demand for carbon-intensive products and services; winners and losers are defined by the ability to shift product portfolio to low-carbon products.

Operational Transition

Increased operational and capital cost due to carbon taxes and investment in carbon emissions mitigation measures, leading to lower profitability ofcompanies.

NeutralLimited exposure to low-carbon transition risk; companies could face physical risk or indirect exposure to transition risk via lending, investment
operations.

Solutions

Potential to benefit through the growth of low-carbon products and services..

14

Foundations of Climate Investing: How Equity Markets Have Priced Transition Risk (msci.com)

15		From Oct. 31, 2013, to Jan. 31, 2021

Nature of potential
disruption

Conclusion

09

MSCI THEMATIC INSIGHT
LEVERAGING ENVIRONMENTALOPPORTUNITIES FOR A RESILIENT FUTURE

Identifying environmental
opportunity themes

Confluence of factors
driving greater interest inenvironmental solutions

Executive Summary

Scale of potential
adoption

Selecting environmental
opportunity themes
positioned for significant
growth tailwinds

Nature of potential
disruption

Conclusion

Exhibit 5:
Some wind turbine manufacturers generate more wind-related revenue than utilities
Top 25 firms by wind-related revenue in the MSCI ACWI Investable Market Index (IMI), as of March 6,2024. Source: MSCI ESG Research

Porpotion of total revenue related to win d(%)

Distribution of wind-related revenue in MSCI ACWI IMI by industry
Nordex100
90
80Goldwind

Ming Yang

EDPR

2% 2%

Vestas

12%

Audax

70

LongyuanChina Three Gorges

Orsted

60

52%

50

EDP
40
30

Dongfang

20

Enel Americas
10
0

China
Engineer
Corp
0

32%

Acciona
Siemens

Xcel
China Resources

Huaneng

Eni
20

RWE

NextEraEndesa
TEPCO

Eneos

Iberdrola
GE

Engie

Total

BP

40

60

80

100

120

Enel

140

160

180

Wind-related revenue (USD billions)Utilities

EnergyUtilities

EnergyIndustrials

Materials

OthersIndustrials

An assessment of different environmental solutions using thetwo analyses above can help investors compare the strengthof potential growth tailwinds due to the transition towards amore sustainable global economy. For example, renewableenergy technologies such as PV cells have high potential for

future adoption and can bring massive transformation to thepower generation sector in terms of avoided carbon
emissions. Favorable assessment on both dimensions makes
PV cells a technology with potentially higher growth tailwinds.
On the other hand, in this context natural gas-based co-generation may face headwinds as it is would not be alignedwith a net-zero emissions scenario, and has only incremental
advantage over existing options in terms of its climate impact.

10

MSCI THEMATIC INSIGHT
LEVERAGING ENVIRONMENTALOPPORTUNITIES FOR A RESILIENT FUTURE

Executive Summary

Confluence of factors
driving greater interest inenvironmental solutions

Identifying environmental
opportunity themes

Selecting environmental
opportunity themes
positioned for significant
growth tailwinds

Scale of potential
adoption

11

Conclusion
The set of environmental opportunity themes proposed in this report may help investors
in identifying business activities with a potential for positive environmental contribution.
Further, two analytical dimensions discussed, the scale of potential adoption and thenature of potential disruption, can help them understand the strength of growth tailwinds
supporting a given environmental opportunity. This approach may support investors in
differentiating potential leader companies, which are exposed to significant growth
tailwinds, from laggard companies in a given set of companies with exposure toenvironmental opportunities.

Manish Shakdwipee
Executive Director, Research, MSCI
Chris Cote
Vice President, Research, MSCI ESG Research
Mathew Lee
Senior Associate, Research, MSCI ESG Research

Nature of potential
disruption

Conclusion

MSCI THEMATIC INSIGHT
LEVERAGING ENVIRONMENTALOPPORTUNITIES FOR A RESILIENT FUTURE

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LEVERAGING ENVIRONMENTALOPPORTUNITIES FOR A RESILIENT FUTURE

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