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How Do You Assess a Fund's Carbon Risk?

Our new Carbon Risk Score, with the Sustainability Rating, can guide investors looking to reduce their climate change exposure.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Jon Hale. He is our director of sustainable investing research. We're going to talk a little bit about the Carbon Risk Score and how investors can use it.

Jon, thanks for joining me.

Jon Hale: Thank you.

Glaser: Let's talk a little bit about the Carbon Risk Score that we rolled out a couple of months ago now. Can you describe exactly what this is and what it's measuring for mutual funds?

Hale: The Carbon Risk Score is a new metric that is based on underlying information from Sustainalytics, our ESG data provider, that is trying to assess a company's risk in relationship to the transition to a low carbon economy. It primarily focuses on carbon emissions in a company's operations and in its products and tries to assess what kind of financial risk does this company face in a transition that would cause them to have to reduce emissions significantly.

Glaser: How is this different from our Sustainability Rating, the globe rating, which we've had for a couple of years now?

Hale: There is a relationship between them, but they are distinct in a couple of ways. Carbon risk obviously focuses on this one broad set of issues related to global warming and climate change. The ESG, the sustainability ratings overall focus on a broader, more holistic assessment of various ESG--environmental, social, corporate governance--issues that are material to any particular company within its particular industry.