A new study released by Morningstar, entitled Measuring Transition Risk and Climate Action in Portfolios, examines climate transition risk and climate action in portfolios through the lens of the Morningstar Sustainalytics Low Carbon Transition Ratings. The study looks at the transition readiness of more than 10,000 companies and 60,000 mutual funds, suggesting ways in which investors can incorporate these metrics into their decisions.
Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, commented: “This study adds to the growing body of research that shows the world isn’t on track to limit global warming at 1.5 degree Celsius. It also highlights that the majority of companies and investment portfolios are failing to take enough action to prepare for the low-carbon transition. While the pace of changes in regulation, technology and consumer behavior is uncertain, the direction of travel is evident. Some businesses and investments will benefit from the transition, while others will be disadvantaged. Given the varying levels of climate action taken by companies and funds, investors must be discerning in their choices.”
Key takeaways from this latest Morningstar research include:
- Low Alignment. The analysis shows that no company or fund is aligned with a net zero pathway consistent with a 1.5-degree Celsius global warming scenario. In addition, only 17% of companies and 3% of mutual funds analyzed are on a 2-degree Celsius trajectory, in line with the Paris Agreement.
- Room for Improvement in Management Practices. Only about 14% of companies examined are taking strong management action to address climate transition risk and the majority (61%) of companies are assessed as having weak management practices.
- US & China Behind Europe. Europe has the highest proportion of companies and funds managing their transition risk and emissions effectively, while most companies in the US & China are not taking enough action.
- Green Bonds Leading the Way. Green Bond funds show the strongest transition management scores as compared to other types of climate strategies.
