10 Stocks for a Low-Carbon Economy

Greener technologies and renewable energy are developing at a steady clip. No wonder: Climate change poses significant business risk to many companies. After all, consumers, policymakers, and investors alike are pressuring companies to reduce their carbon footprints. The societal shift away from carbon will affect companies financially; how adeptly companies can adjust their operations and products to the economy of tomorrow will determine which will survive and thrive. To find companies that can effectively compete in the transition to a low-carbon economy, we’re turning to The Morningstar US Low Carbon Risk Index. The index features large- and mid-cap stocks that have undergone a carbon risk assessment by Sustainalytics. The index is powered by the same carbon risk assessment and fossil-fuel involvement methodology behind our Morningstar Portfolio Carbon Metrics for funds. The assessment captures how vulnerable a company is in the transition away from a fossil-fuel-heavy economy. Specifically, the index’s investable universe includes large- and mid-cap stocks to which Sustainalytics has assigned a Carbon Risk Score. Those companies deemed to have Severe carbon risk are excluded from the list. Companies are then weighted based on their Carbon Risk Scores through an optimization process that controls for maximum position size, sector weights relative to its benchmark, and other factors. You can view a list of the index’s portfolio; its 10 largest positions as of the end of the first quarter appear below. Not surprisingly, the top-10 list is dominated by companies from sectors that generally have little carbon risk, such as healthcare, technology, telecommunication services, and consumer--not the higher-carbon-risk sectors like energy, utilities, and basic materials. These names aren’t all trading in buying range today according to our metrics, but they’re all fine choices for a low-carbon stock watchlist.

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