Morgan Stanley recently surveyed over 900 institutional investors to understand their current thoughts on sustainable investments. With climate adaptation and resilience growing in prominence as themes, investors cited catastrophe bonds and physical risk insurance contracts among their top picks.
Interestingly as well, 90% of North American asset owners said they would plan to increase the proportion of their assets held in sustainable strategies over the next two years.
“In our latest global survey of institutional investors, the majority expect to increase their proportion of assets in sustainable funds – with financial performance and a maturing track record driving these allocations,” explained Jessica Alsford, Chief Sustainability Officer and Chair of the Institute for Sustainable Investing at Morgan Stanley.
While investors recognise challenges in sustainable investments, they acknowledge that sustainability is an important way to manage investment risk as well.
While energy efficiency and renewable energy are the top two investment themes, climate adaptation has now risen to third in the list, the survey from Morgan Stanley shows.
The multinational investment bank and financial services company highlights that more than 75% of the institutional investors surveyed acknowledged that physical climate risks are expected to have an impact on asset prices in the next five years, the global investment bank’s survey reveals.
“Investors are responding by seeking out opportunities to invest in climate adaptation and resilience strategies that can help businesses and communities withstand the physical and economic impacts of climate change, particularly data and analytics, water infrastructure and modernization of the electric grid,” Morgan Stanley said.
Climate adaptation is “moving from a niche area to a more central focus” the investment bank continues to explain. In moving up to third in 2025, from sixth when the last survey was undertaken, it has moved up the priority ranks for institutional investors globally, it seems.
Underscoring why this is becoming a priority, some 35% of respondents said they expect climate-related physical effects will have major pricing impacts that are widespread across the market, while another 42% said they expect some major pricing impacts but on a limited number of assets.
Given that perceived risk of physical impacts due to climate related risks, it is perhaps no surprise investing into physical risk insurance contracts, such as catastrophe bonds and insurance-linked securities (ILS), is seen as a climate adaptation investment option that should be prioritised over the coming years.
Morgan Stanley’s survey asked the 900+ institutional investors around the world what solutions they are prioritising as climate adaptation investments over the next one to three years.
Some 34% of investors globally highlighted physical risk insurance contracts such as catastrophe bonds as an investment category they will prioritise.
Interest in insurance-linked securities such as catastrophe bonds and insurance or reinsurance covering physical risks varied by region, from around 32% in North America, to 33% in Europe and around 36% in Asia Pacific.
While this category came in seventh on the list of climate adaptation related investment priorities, the top theme chosen by the surveyed investors was data and analytics tools at 49% and physical risk insurance contracts such as cat bonds only came in slightly behind flood protection and coastal defence related investments.
Which demonstrates the rising profile of cat bonds, ILS and reinsurance-linked investments tied to physical catastrophe and weather risks, as well as the fact these continue to be seen as a sustainable investment category of note by many institutional allocators and asset managers around the world.
The data shows institutional investors awareness that there are returns to be generated by becoming a capital provider to protect against physical climate related risks and natural catastrophes.
At the same time, there is a growing awareness of the physical risks embedded in asset portfolios as well. In our experience this is resulting in rising interest among certain types of asset managers and owners that there could be risk transfer solutions that help them to carve some of the risks out of those asset classes which are most exposed to climate, weather and catastrophes.
We’ve already seen some examples of investment managers utilising catastrophe bonds, or other structures including parametric insurance, to carve out or hedge physical risks from portfolios of real estate and other assets.
Together, these two trends, of investing in and utilising physical risk insurance and transfer, including from the capital markets, remain key themes for institutional allocators around the world, which suggests increasing numbers of them will spend time on insurance-linked securities in years to come.
