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, investors can turn 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, Morningstar's ESG research partner. 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.
The below constituents from the index's portfolio are all at least 20% undervalued as of this writing and carry only negligible carbon risk classifications. They are all ideas to investigate further if you're looking for reasonably priced companies that are well-positioned for a low-carbon economy.
Disclosure: Morningstar, Inc. licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Neither Morningstar, Inc. nor its investment management division markets, sells, or makes any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.