Investing in companies that have lower than average exposure to fossil fuel involvement makes good business sense. Companies face increasing pressure to lower their carbon emissions from many sources, such as regulators, customers, and investors. Implementing changes to a company's process that move it away from being reliant on fossil fuels can be a costly endeavor. And it's a transition that is already under way, says head of sustainability research Jon Hale.
To find funds focused on companies that have less economic value at risk in the transition to a low-carbon economy, we developed the Morningstar Low Carbon designation. The first step in the process is an assessment of a company's exposure to carbon risk, which comes mainly from carbon emissions in its own operations and from the use of its products. The second step is an assessment of a company's management of that exposure--its actions and its strategy, if there is one, to lower emissions and develop products and services that are less carbon intensive. This process yields a score for a company that reflects its remaining unmanaged carbon risk. We rely on Sustainalytics, our environmental, social, and governance research partner, to supply this company-level information.