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How to Address Climate Risk in Your Portfolio

How to Address Climate Risk in Your Portfolio
Securities In This Article
Nuveen Social Choice LwCrbn Eq R6
Parnassus Core Equity Investor
SPDR® S&P 500 Fossil Fuel Rsrv Free ETF

Jon Hale: Hi, I'm Jon Hale, Morningstar's director of sustainable investing. As we continue to experience more frequent extreme weather events, it seems like climate change has really started to hit home, and as a result, opinions are shifting. A survey by the University of Chicago found that 70% of Americans believe climate change is real, and many said first-hand experience of extreme weather events did the most to shape their views. So, it comes as no surprise that I'm getting more questions from fund investors about how they can address climate risk in their portfolios.

Well, your first move is to try to get a hand on the climate risk in your current holdings. Easier said than done, but at Morningstar, we have a measure called carbon risk that's based on an assessment of how carbon emissions and the societal shift away from carbon may affect a company financially. We roll that information up to the portfolio level. If you own a value-leaning stock fund, a large-cap core U.S. fund, or an international fund with Asia or emerging-markets exposure, chances are your fund is exposed to carbon risk.

To find out more about what your fund manager is thinking on climate change, there's one really simple thing you can do. Use a search engine to check their websites and other public comments. If you can't find anything, to me, that's a giant red flag. It means your fund manager has had nothing to say publicly about this issue that's reaching crisis proportions and has clear investment implications.

To find a fund that has lower carbon risk, you can lean toward funds that employ a growth-leaning investment style, because they tend to avoid industries with the most carbon risk. Or you can look for diversified low-carbon funds such as TIAA-CREF Social Choice Low Carbon Equity or the SPDR S&P 500 Fossil Fuel Reserve Free ETF.

Finally, you can look for funds that receive our low-carbon badge, which means they have low carbon risk and low fossil fuel exposure. There are 102 such funds in the large-blend category alone, including the Silver-rated Parnassus Core Equity and Vanguard FTSE Social Index funds.

It's hard to say exactly how and when climate risks will manifest themselves in portfolios. But one thing is sure; in today's climate, you want fund managers who are on top of it.

For Morningstar, I'm Jon Hale. Thanks for watching.

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About the Author

Jon Hale

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Jon Hale, Ph.D., CFA, was head of sustainability research for Morningstar. He directs the company’s research initiatives on sustainable investing, beginning with the launch of the Morningstar Sustainability Rating™ for funds in 2016.

Before assuming this role in 2016, Hale was director of manager research, North America, for Morningstar, where he led approximately 60 manager research analysts based in North America and oversaw the team’s operations, thought leadership, and manager research coverage across asset classes.

Hale first joined Morningstar in 1995 as a mutual fund analyst and helped launch the institutional investment consulting business for Morningstar in 1998. He left the company in 1999 to work for Domini Social Investments, LLC before rejoining Morningstar as a senior investment consultant in 2001. He became managing consultant in 2009 and head of the Investment Advisory unit in 2014.

Hale holds a bachelor’s degree, with honors, from the University of Oklahoma and a doctorate in political science from Indiana University.

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