Investors are increasingly recognizing the risks posed by climate change. Climate-related risks range from the increasingly evident physical effects of global warming to the low-carbon economic transition that is necessary to mitigate the worst effects of global warming. Climate change poses physical risks resulting from the increased severity and incidence of extreme weather events and from the longer-term changes in precipitation and the variability of weather patterns due to rising temperatures and rising sea levels. These risks can have disparate impacts on industries and on companies within a given industry both in terms of their operations and demand for their products and services.
Climate change also poses transition risk, also referred to as carbon risk, which addresses how vulnerable a company is to the transition away from a fossil-fuel-based economy to a lower-carbon economy. Such a transition is required to meet the goals of the Paris Agreement to keep the global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the rise in temperature to 1.5 degrees Celsius. Specific transition risks include policy and legal regulations limiting carbon emissions, pressure on firms to align their strategies with the Paris Agreement’s 2-degree scenario, switching costs to new technologies, and changing consumer preferences.
The Morningstar® Portfolio Carbon Risk Score moves beyond carbon footprinting to provide a direct assessment of the carbon risk embedded in a portfolio. The portfolio Carbon Risk Score is displayed as a number between 0 and 100 (a lower score is better). A portfolio’s Carbon Risk Score is the asset-weighted sum of the carbon risk scores of its holdings, averaged over the trailing 12 months. The carbon risk of a company is Sustainalytics’ evaluation of the degree to which a firm’s activities and products are aligned with the transition to a low-carbon economy. The assessment includes carbon intensity, fossil fuel involvement, stranded assets exposure, mitigation strategies, and green product solutions.
Contribution: UI/UX Designer