The new Morningstar Low Carbon Designation is given to funds that exhibit low overall carbon risk and have lower-than-average exposure to companies with fossil-fuel involvement. Carbon risk is an assessment of how vulnerable a company is in the transition away from a fossil-fuel intensive economy. Specific risks include policy and legal regulations that limit carbon emissions or put a cost on carbon emissions; public and consumer pressure on companies to align their strategies with the Paris Agreement's 2-degree scenario; and switching costs to new green technologies. More than half of the 4,000 companies in Sustainalytics' coverage universe have some exposure to carbon risk, based on Sustainalytics' new assessments of company carbon risk. To evaluate carbon risk at the portfolio level, Morningstar rolls up the Sustainalytics company carbon risk scores on an asset-weighted basis.
For a fund to receive the Low Carbon designation, it must have a Morningstar Portfolio Carbon Risk Score below 10 for the trailing 12 months and exposure to companies with fossil-fuel involvement below 7% over the same trailing 12 months. Sustainalytics sorts companies with risk scores below 10 into the Low risk category, so we are requiring the same for portfolios. The portfolio exposure threshold for fossil-fuel-involved companies was set at 7% because it represents about a one-third lower level of exposure to these companies than that of major global indexes.
Jon Hale, Ph.D., CFA has a position in the following securities mentioned above: VFTSX. Find out about Morningstar's editorial policies.