The indices provide diversified exposure to equities across regions and highlight companies aligned with the transition to a low-carbon economy targeting low portfolio-level carbon risk and fossil fuel exposure, the group said.
“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 Indices.
Morningstar’s Low Carbon Risk indices use Sustanalytics’ Carbon Risk Ratings – which allow it to assess a company’s overall carbon exposure and the management of that exposure – to evaluate whether a company is positioned to survive and thrive in a low-carbon economy.
The Morningstar Low Carbon Risk indices are derived from the large- and mid-cap segments of their equivalent broad market benchmark.
The constituents of the Morningstar Global Markets Low Carbon Risk Index, for example, come from the Morningstar Global Markets Large-Mid Cap Index, which targets 90% of global equity market capitalisation across developed and emerging markets.
To be eligible, a company must have undergone a carbon risk assessment by Sustainalytics, which provides carbon research on more than 4,000 companies across 130 industry groups.
The indices are constructed using the 12-month trailing averages of both the Morningstar Portfolio Carbon Risk Score and the Morningstar Portfolio Fossil Fuel Involvement, a weighted average of constituent-level exposure to fossil-fuel-intensive industries. The number of stocks in each index is variable and subject to eligibility requirements, the results of the optimisation process, and weighting considerations.
Indices are rebalanced quarterly in March, June, September and December, and reconstituted semi-annually in June and December, on the Monday following the third Friday of the month. The Carbon Risk score data used for reconstitution is as of the last trading day in May and November.
Low carbon designation
The move follows Morningstar’s introduction of the the Morningstar Low Carbon Designation for funds and the Morningstar Portfolio Carbon Risk Score last year to establish a methodology for investors to evaluate their portfolios’ carbon risk.
In 2016, the company launched the Morningstar Sustainability Rating to help investors evaluate funds based on environmental, social and governance (ESG) factors.