Investors can respond to regulatory initiatives and manage material climate-related risks with access to in-depth insights into a company’s preparedness to transition to a low-carbon economy.
Morningstar Sustainalytics has launched Low Carbon Transition Ratings that provide investors with a forward-looking assessment of a company’s current alignment to a net-zero pathway that limits global warming to 1.5 degrees Celsius.
The ratings offer a holistic evaluation of a company’s strategy and actions toward meeting its net-zero commitments. This gives investors a clear and comparable view of its policies, governance practices, and investment plans. The ratings currently cover around 4,000 of the largest public companies and will expand to include over 12,500 companies by 2024.
According to Sustainalytics, despite increasing number of companies committing to net-zero goals to support global climate objectives, only a quarter have set substantial targets for reducing emissions. Furthermore, only 8% of these companies have strong incentives to improve their greenhouse gas (GHG) performance, with the utilities and real estate sectors leading the way. Based on Sustainalytics’ evaluation of these companies’ current efforts to reduce GHG emissions, the planet is expected to warm by 2.9 degrees Celsius, significantly higher than the Paris Agreement’s target of limiting the temperature increase to 1.5 degrees Celsius.
The Low Carbon Transition Ratings help investors identify and manage transition risks, respond to global regulatory requirements and disclosure initiatives, build climate investment strategies, and advance engagement activities.
The ratings are based on an Implied Temperature Rise and scenario analysis from the PRI-commissioned Inevitable Policy Response (IPR). The ratings include over 85 management indicators weighted by GHG emissions and grouped by TCFD themes.
The IPR’s Required Policy Scenario (1.5 degrees Celsius RPS) is an ambitious set of policies and actions that go beyond current stated policies to keep global warming below 1.5 degrees Celsius. This scenario is based on the International Energy Association’s Net-Zero scenario, which covers various sectors and assumes technological advancements and changes in land use. Morningstar Sustainalytics adjusts the 1.5 degrees Celsius RPS to a net-zero budget specific to each company, considering the location of their operations and business activities.
Morningstar Indexes will introduce a new suite of global climate indexes later this year underpinned by the Low Carbon Transition Ratings of Morningstar Sustainalytics. These indexes will cater to investors wishing to track their portfolios’ Net Zero trajectory. In addition, they will offer exposure to companies that have committed to delivering a business model transformation and effectively managing climate transition risks.
“Transition-related risks for companies can result in increased costs due to shifting technologies, financial risks due to policy changes, and reduced access to capital. With these risks becoming more imperative to understand, investors require a science-based assessment to determine the impact on their portfolios. IPR is delighted that Morningstar Sustainalytics has selected our scenario analysis for use in their Low Carbon Transition Ratings. We look forward to working together more closely as investors embrace these new signals to make more informed investment decisions.”
Julian Poulter, head of investor relations at the Inevitable Policy Response.
