Morningstar Launches Portfolio Carbon Risk Score

The Carbon Risk Score moves beyond carbon footprinting to provide an assessment of the carbon risks and opportunities embedded in a portfolio

At its 12th annual UK investment conference in London, Morningstar, Inc., a leading provider of independent investment research, today introduced the Morningstar® Portfolio Carbon Risk Score™, a measure that will help investors evaluate a portfolio’s exposure to carbon risk. Portfolios that have low carbon-risk scores and low levels of fossil-fuel exposure will receive the Morningstar® Low Carbon Designation™ to help investors quickly identify low-carbon funds. Companies held within those portfolios tend to have low carbon emissions or are lowering carbon emissions in line with the goals of the Paris agreement in their own operations and by developing carbon solutions.

“Climate change will pose great challenges to investors seeking to balance their desire for high returns with a commitment to achieving a positive environmental impact. Given this, investors will need a means of more precisely analyzing their portfolio exposures to ensure they meet the realities of a carbon-constrained future,” said Haywood Kelly, Morningstar’s global head of research. “The new Carbon Risk Score and Low Carbon Designation put that power in investors’ hands to monitor, manage, and reduce risks stemming from carbon exposure in portfolios.”

Morningstar will initially assign the Carbon Risk Score to approximately 30,000 funds globally, and the scores will range from low to high, with a lower score suggesting a lower risk of carbon exposure within a portfolio. Morningstar calculates the Carbon Risk Score based on company-level carbon-risk assessments from Sustainalytics, a leading independent provider of ESG and corporate governance ratings and research.

It can be viewed among a larger set of 70 Morningstar® Portfolio Carbon Metrics™ that includes Carbon Intensity, Fossil Fuel Involvement, Stranded Assets Risk, and Green Solutions by holding companies that have low levels of material carbon risk.

“Sustainalytics and Morningstar share the same commitment—to provide investors with the insights to make more informed decisions,” said Michael Jantzi, Sustainalytics’ chief executive officer. “The Carbon Risk Score and Low Carbon Designation build on Sustainalytics’ company-level carbon risk research to help investors better understand the potential carbon-related risks inherent in their portfolios.”

Morningstar analysis finds that, among diversified developed-market equity strategies, Europe ex-UK funds generally have the lowest carbon-risk score, Asia ex-Japan the highest, and the United States lands in the middle while diversified-emerging market equity strategies tend to have higher carbon-risk scores. “Investors are looking for ways to lower carbon risk in their portfolios and they can use the carbon risk score to understand the relative risk that funds have in different regions,” said Jon Hale, Morningstar’s director of sustainability research. “Our analysis using the carbon-risk metrics finds that investors have low-carbon fund choices across virtually all investment styles and regions.”

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