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Investing Trends

How We’re Helping Investors Evaluate Carbon Risk

Morningstar's new metrics offer a simpler way to identify low-carbon funds

Investors are increasingly recognizing the risks and opportunities posed by climate change, yet they typically don’t know the extent to which a portfolio is exposed to carbon risk. Carbon risk, also referred to as transition risk, is about how well-positioned a company is to make a successful transition to a low-carbon economy.

As the world moves toward greenhouse gas emissions reductions to the meet the goals of the Paris climate accord, investors need tools to monitor, manage, and reduce risks stemming from carbon exposure in portfolios.

How to analyze carbon risk in portfolios

To help investors better understand carbon risk in portfolios, Morningstar has developed portfolio carbon-risk scores. These scores are based on company-level, carbon-risk ratings from Sustainalytics, a leading provider of environmental, social, and governance (ESG) research. The carbon-risk ratings evaluate how well companies are prepared to transition to a low-carbon economy by limiting carbon emissions and developing green solutions. The Morningstar® Portfolio Carbon Risk Score™ is the asset-weighted average risk rating of companies in a portfolio.

The Carbon Risk Score is among a broader set of 70 portfolio carbon indicators—the Morningstar® Portfolio Carbon Metrics™—that includes other key measures that investors can use to evaluate carbon exposure and risk, such as Carbon Intensity, Fossil Fuel Involvement, Stranded Assets Risk, and Green Solutions. The dataset includes category rankings on all portfolio metrics.

Ways to use Morningstar’s new carbon metrics

Portfolio managers and analysts can use Morningstar’s new carbon metrics to analyze long-term risks and conduct carbon portfolio analysis. Wealth management firms can enhance manager research due diligence by adding portfolio carbon metrics to existing financial criteria in Morningstar℠ Cloud. Asset managers who are committed to reporting to stakeholders on the portfolio carbon risk can use the data to show progress toward de-carbonization and fossil-fuel divestment.

These carbon metrics complement the Morningstar® Sustainability Rating™ and can help investors achieve environmental impact with their investments.

A simpler way to identify low-carbon funds

Portfolios that have low carbon-risk scores and low levels of fossil-fuel exposure will receive the Morningstar® Low Carbon Designation™. The low carbon designation, represented by a green leaf icon, helps investors quickly identify low-carbon funds and brings to light the availability of low-carbon investment choices across asset classes.

The designation indicates that a portfolio is aligned with the transition to a low-carbon economy, by holding companies that have low levels of material carbon risk. Many companies held in low-carbon portfolios tend to have low carbon emissions or are reducing carbon emissions in line with the Paris climate accord’s goal of minimizing global average temperature increase this century to well below 2 degrees Celsius. Companies with low-carbon risk may reduce carbon exposure through their own operations or development of carbon solutions, such as green transportation or renewable energy.

Increasing investor interest in sustainable investing

In 2017, we saw record flows into ESG funds, and our studies show there’s no performance penalty when investing in sustainable strategies.

Climate change will continue to be a defining theme in the global economy. The longer an investor's time horizon, the more climate-related risks compound. Yet even short-term investors will be affected by regulatory and policy developments, technological disruption, and extreme weather events.

The Morningstar Portfolio Carbon Risk Score and the entire suite of carbon metrics provide investors with a way to incorporate transition risk into their decisions.

Please see below for important disclosure.

Read more about our new carbon metrics and how to use them by downloading “Measuring Transition Risk in Fund Portfolios.”
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As of May 1, 2018, the Portfolio Carbon Metrics are available on®,™, in all Morningstar Cloud editions, and data feeds. Throughout 2018, carbon metrics will be added to Morningstar® Advisor Workstation℠, Morningstar Direct℠, Morningstar® Essentials℠, and Morningstar’s European websites.

Important Disclosure

The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission.