The Takeaway
- The Morningstar® Low Carbon Transition Leaders Indexes™ offer investors a means of aligning portfolios with companies whose managements are demonstrating progress toward net zero.
- The indexes are designed to provide diversified, broad-market exposure to companies leading their sector peers in their readiness for—and action towards—climate transition.
- Analysis of the indexes demonstrates that investments aligned with a low-carbon economy need not deliver inferior performance. In fact, as the world moves away from fossil fuel dependence, companies prepared for or promoting the transition may be well positioned to prosper.
Investors across geography and size are increasingly focused on climate change. Morningstar’s Voice of the Asset Owner Survey found that “climate is king” for many institutional fiduciaries, who see shifting weather patterns and the transition to net zero carbon emissions as financially material. Climate-oriented investment strategies are capturing retail assets, mostly from Europe, where regulation is a powerful impetus.
Yet the goal of net zero carbon emissions remains aspirational. The Paris Agreement’s target to limit global warming to 1.5 degrees Celsius beyond preindustrial levels is currently out of reach, based on decarbonization efforts to date. Climate-focused investors have learned to be skeptical of corporate net zero pledges.
The Morningstar® Low Carbon Transition Leaders Indexes™ offer investors a means of aligning portfolios with companies whose managements are demonstrating progress toward net zero. Through a simple, objective methodology, the indexes represent a practical approach to equity-focused climate investing that does not automatically exclude carbon-intensive sectors. The indexes select on both carbon intensity and a thorough assessment of corporate management efforts from Morningstar Sustainalytics. Not only can minimizing deviation from the broad market help avoid underperformance in certain market conditions, it’s also an acknowledgement that fossil-fuel businesses won’t disappear overnight. They can even be part of the solution to climate change.
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