The new Morningstar Portfolio Carbon Risk Score gives investors the means to evaluate the carbon risk embedded in a fund's portfolio. Sometimes referred to as transition risk, carbon risk addresses how vulnerable a company is financially to the transition away from a fossil-fuel-based economy to a lower-carbon economy. Such a transition is required to keep the global temperature rise this century well below 2 degrees Celsius above preindustrial levels. It's a transition that is already under way, as companies respond to pressure to lower their carbon emissions from regulators, customers, other stakeholders, and investors. As for the latter, more and more investors globally are interested in understanding carbon risk and its implications for the risk and return of their portfolios.
Let's take a closer look at how the Carbon Risk Score works, how to use it, and what the initial scores indicate about funds.
Jon Hale, Ph.D., CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.