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5 Gold-Rated Funds Ready for the Move to Clean Energy

These funds' portfolios face lower economic risk from exposure to fossil fuels.

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.

The company-level information is then rolled up into a single score at the fund portfolio level: The Carbon Risk Score is the asset-weighted Sustainalytics carbon-risk rating of companies held in a portfolio. Fund portfolios that exhibit low overall carbon risk and have lower than average exposure to companies with fossil-fuel involvement will receive the Morningstar Low Carbon designation, shown below. A Low Carbon designation means that on an asset-weighted basis, the companies in the fund's portfolio are already operating with relatively low exposure to fossil fuels, and therefore will require less costly retrofitting and adaptation to comply with stricter carbon standards. (Carbon metrics are available on the beta versions of fund quote pages. This article provides step-by-step directions to find the new data points.)

This list shows five Gold-rated funds that currently earn the Low Carbon designation. (Premium members can see the full list of 20 Gold-rated funds with Low Carbon designations.)

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