Whatever you think of global warming, the fact is, corporations and governments around the world understand it as an established fact and are slowly taking steps to mitigate it. That dynamic can have a profound impact on your clients’ portfolios.
“Climate change represents a defining issue for the investor community,” said Amy O’Brien, global head of responsible investing at Nuveen. The asset manager recently wrote a white paper on the issue. “As the world convenes to discuss global issues during Climate Week and the UN General Assembly, we remind investors to focus on the value of understanding how this long-standing issue is transforming markets, policy and our financial well-being as investors.”
Climate Week NYC is a global event that happens annually during the UN General Assembly. In light of the event, WealthManagement.com compiled a list of the 20 mutual funds with the highest Carbon Risk Score, according to Morningstar data. Morningstar introduced its Portfolio Carbon Risk Score in May, which identifies funds that hold companies with low carbon emissions or are lowering carbon emissions in line with the Paris agreement. The carbon risk score is assigned at the company level, via Sustainalytics, the provider of ESG and corporate governance ratings and research, which Morningstar acquired a stake in last year. Sustainalytics evaluates how much unmanaged carbon risk remains for a company after accounting for its management activities that mitigate overall carbon risk exposure. The Carbon Risk Score for the mutual fund is the asset-weighted Sustainalytics carbon risk rating of companies held in a portfolio. (The higher the Carbon Risk Score, the more severe the carbon risk is in the portfolio.)
The score is not an indicator of poor performance. The Copley Fund, for example, has a four-star Morningstar rating. And many of these have been top performers. But impact investing is a rising trend, and the climate change thesis is one investors should be paying attention to and these scores can help clients with insights about the funds they might, or perhaps even likely, otherwise lack. Even clients with a desire to only invest sustainably may be in some of these funds.
For our list here, we asked Morningstar to exclude categories of funds that are more obvious polluters, such as utilities, natural resources, equity energy and energy limited partnership funds. That said, some obvious choices still ended up here. Portfolios overweighted to energy, utilities, materials and industrials tend to have higher carbon risk levels, as do emerging markets funds.
We included Morningstar’s Carbon Risk Score, as well as the percent of fund’s assets under management that have carbon risk scores. When a fund holds shares from companies that are not under coverage, its percent of assets under management covered will be less than 100 percent. We also include Morningstar’s carbon designation; portfolios with a Low Carbon Designation have low overall carbon risk and lower-than-average fossil fuel exposure.