Skip to Content
Morningstar Product Insider

Which Markets are Prepared to Transition to a Low-Carbon Economy?

The U.S. rank will surprise you

If you had to guess which countries are best prepared to transition to a low-carbon economy, the Netherlands, Denmark, and France might reasonably come to mind.

But the United States? The U.S. isn’t known as a leader when it comes to combatting climate change. The U.S. is the world’s second heaviest emitter of carbon dioxide behind China, according to the International Energy Agency. And in 2017, the Trump administration announced its intention to withdraw from the Paris climate agreement.

Yet, when judging the carbon profiles of the companies that constitute the U.S. equity market, a different perspective emerges.

Here’s a carbon risk map from the latest edition of the Morningstar Sustainability Atlas, which examines Morningstar’s global family of equity market indexes on a variety of environmental, social, and governance criteria, including Morningstar® Portfolio Carbon Metrics.

How is the U.S. transitioning to a low-carbon economy?

According to the map above, a low level of U.S. stock market value is at risk from the transition to a low-carbon economy. This puts the U.S. in the company of western European countries that score consistently well across ESG measures. The Morningstar® Portfolio Carbon Risk Score™ assesses the degree to which corporate value is vulnerable to the effects of climate change and the shift away from fossil fuels. Companies with low level of risk, as assessed by Sustainalytics, are well-positioned to survive and thrive in a low-carbon world.

The sectoral dynamics of the U.S. equity market help explain the low Carbon Risk Score. Country index scores are weighted averages of constituent companies’ carbon risk levels. Energy companies face the highest levels of carbon risk, including those related to policy, regulation, brand, and stranded assets.

On the low carbon-risk side are healthcare and technology, which represent more than one third of the U.S. equity market capitalization. Meanwhile, less than 6% of Morningstar US Market Index’s weight is in energy stocks.

How do other countries compare?

Contrast this to Russia, with nearly 60% of market capitalization devoted to the energy sector and the world’s highest level of carbon risk.

Canada is another country with a high level of equity market capitalization facing transition risk. More than a third of the Morningstar Canada Index weight is in energy and basic materials stocks.

Then there are countries such as Australia, South Africa, and Mexico. These markets look carbon-intensive on current metrics, but their companies are doing a good job of managing carbon risk.

Looking forward, Morningstar Indexes will be launching a family of low-carbon benchmarks that will emphasize companies best-positioned for the transition to a low-carbon economy.  

Dan Lefkovitz is a strategist for Morningstar's Indexes group.

Download the Morningstar Sustainability Atlas to learn more about how countries are transitioning to a low-carbon economy.
Get My Copy

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.