Investment research firm Morningstar has unveiled the Morningstar Low Carbon Risk Indexes, a new group of equity indexes that emphasize companies aligned with the transition to a low-carbon economy.
Sanjay Arya, Head of Indexes at Morningstar.
“Climate change is a significant challenge that impacts investors,” said Sanjay Arya, Head of Indexes at Morningstar. “This new family of indexes will empower investors to evaluate and invest in companies that are adapting to the low-carbon economy and managing their businesses strategically for the long term.”
Arya continued, “Whether motivated by environmental concerns, fiduciary obligations or investment outcomes, I believe the new indexes offer more options to lower carbon exposure without compromising returns.”
Each index is derived from a broad market Morningstar index that represents large and mid-cap equities performance for that region. For example, the constituents of the Morningstar Global Markets Low Carbon Risk Index – the debut index unveiled in the suite – come from the Morningstar Global Markets Large-Mid Cap Index which targets 90% of global equity market capitalization across developed and emerging markets.
Morningstar has partnered with Sustainalytics – a leading global analytics firm covering the ESG sector – in the construction of the indexes. Sustainalytics provides carbon research on more than 4,000 companies across 130 industry groups.
Specifically, the indexes utilize Sustainalytics’ Carbon Risk Ratings which assess a company’s overall carbon exposure as well as the management of that exposure.
“These indexes go beyond the common approach of carbon footprinting, which reflects current emissions and is just a starting point for analysis of carbon risk,” said Dan Lefkovitz, Strategist for Morningstar Indexes. “Our new Morningstar Low Carbon Risk Indexes are the first to leverage Sustanalytics’ Carbon Risk Ratings – which assesses not only a company’s overall carbon exposure but also its management of that exposure – to ultimately evaluate whether a company is positioned to survive and thrive in a low-carbon economy.”
Each index is created through an optimization process that targets low-carbon risk and fossil fuel exposure at the portfolio level.
According to Morningstar, the number of stocks in each index is variable and subject to eligibility requirements, the results of the optimization process, and weighting considerations. Reconstitution occurs semi-annually, while rebalancing occurs quarterly.
Given the high number of ESG (environmental, social, and corporate governance) fund launches in 2018, and the strength of both Morningstar’s and Sustainalytics’ pedigree, the indexes will likely draw the attention of exchange-traded fund issuers who may look to license the indexes for ETF product development.