Morningstar Magazine - June/July 2018 - 81

0.1-9.99

Low

Negligible

744
696
0

600

1,200

1,800

2,400

EXHIBIT 2

Range of Portfolio Carbon Risk Scores by Global Categories Within regions, scores
varied greatly, but the averages all land in the medium risk range.
Fund Type

Lowest 5%

Middle 90%

Highest 5%

Average

Global
US
Canada
Developed Europe ex-UK
UK
Developed Asia ex-Japan
Japan
Australia/NZ
Emerging Markets
Emerging Asia
Emerging Europe
Africa/Middle East
Latin America
Source: Morningstar. Data as of April 2018.

threat that may lead to significant underperformance relative to the overall market or even
threaten their existence.1
Some industries, such as those in the technology
and healthcare sectors, have little carbon
exposure to begin with, so companies in those
industries all have low levels of carbon risk. Other
industries, such as integrated oil and gas, electric
utilities, and autos, have significant carbon
exposure. For some industries, a significant portion
of that risk is unmanageable. Airlines, for example,
can only manage a portion of their carbon
exposure because alternatives to fossil-fuel-based
jet fuel do not exist. But some of their carbon
risk can be managed lower through improved
routing efficiency or engineering planes for better
fuel economy. All airline companies have carbon
risk in the medium range, but Southwest
Airlines LUV has the lowest carbon risk within
the group, nearly 30% lower than that of American
Airlines AAL, which has one of the highest risk
levels within the group.
Morningstar Portfolio Carbon Risk Score

footprint does not consider the financial materiality
products. The second step is an assessment of a
Sector Funds
Carbon Risk Score
of a company's carbon risk exposure or its strategy
company's management of that exposure-
Energy
IXC such risk.
to
manage
its actions and its strategy, if there is43.01
one, to lower
emissions
and
develop
products
and
services
19.71
Utilities JXI
that are less carbon intensive. This process yields
Sustainalytics, Morningstar's environmental, social,
Materials
MXI research partner, developed
17.23
a score for a company that reflects its remaining
and
governance
aIndustrials
carbon risk
unmanaged carbon risk.
EXIrating for companies that focuses on 15.55
risk rather than exposure. Its carbon risk rating
Real Estate REET
11.96
evaluates the degree to which a company
Company unmanaged risk scores range from low
Financials
IXG the transition to a low-carbon 11.13
is
aligned with
to high starting from zero and are sorted into
five risk categories ( EXHIB IT 1 ). Many companies
economy.
The rating
Telecom Services
IXPis based on an assessment
9.04of
have scores of zero, indicating that their
a company's carbon exposure and its management
Consumer Discretionary RXI
8.29
carbon risk is negligible. Companies with scores
of that exposure. A company's carbon risk is the
Consumer Staples
5.33after
more than zero but less than 10 are considered
unmanaged
carbonKXI
exposure that remains
to have low levels of unmanaged carbon risk
considering
management
Information the
Technology
IXN activities undertaken
2.91
that could have some material impact on company
to mitigate it.
Health IXJ
1.19
value. At the other end of the scale, companies
0 is an
10 with scores
20 from 30 to 49
30.99 have high40carbon risk,50
The first step in determining the rating
assessment of a company's exposure to carbon
risk, which comes mainly from carbon emissions in
its own operations and from the use of its

and those at 50 or above carry severe carbon risk.
Companies with high and severe carbon risk
face transition risk that poses a serious financial

Using Sustainalytics' carbon risk rating for companies as the building blocks, Morningstar
created the Morningstar Portfolio Carbon Risk
Score, a new metric that investors can use to
evaluate carbon risk at the portfolio level.
The score is calculated across Morningstar's global
mutual fund and managed accounts universe,
thereby allowing for fund-to-fund comparisons, category and bench-mark comparisons,
and longitudinal comparisons.
EXHIB IT 2 shows the average portfolio carbon risk
scores across a range of Morningstar global
investment categories. Diversification helps keep
the average fund's carbon-risk score in the
medium risk range, with developed-markets equity
funds landing near the low end of it. Diversified
global equity portfolios that invest primarily in
developed-markets equity have an average carbonrisk score of 10.42. Within developed-markets
regions, Europe ex-UK has the lowest score, 10.05,
while Asia ex-Japan has the highest, at 14.54.

1 Because carbon risks can materialize at an unknown future time, a company's carbon-risk level is not a specific prediction of financial or share-price impacts or of the time horizon over which such
impacts might be felt.

global.morningstar.com/Morningstarmagazine

http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2018