Morningstar Sustainalytics has launched its Low Carbon Transition Ratings, aimed at providing investors with an assessment of a company’s alignment with a net zero pathway, based on an evaluation of its strategy and actions as well as scenario analysis.
Introduced after nearly two years of development, the new ratings are expressed as an Implied Temperature Rise, indicating a company’s exposure to low carbon transition risks and opportunities, based on an analysis of its business model, emissions and management performance.
The ratings also draw on scenario analysis from the UN Principles for Responsible Investment’s (PRI) Inevitable Policy Response’s Required Policy Scenario (RPS), which considers policies and actions needed to keep global warming below 1.5 degrees Celsius.
These range from ending deforestation by 2025, decommissioning coal in China by 2035, and phasing out new fossil cars in almost all markets by 2040.
The rating reconciles the RPS scenario to a company-specific net zero budget, with consideration given to the company’s location of operations and business activities.
The new service will cover approximately 4,000 of the largest public companies, with Morningstar Sustainalytics aiming to expand to more than 12,500 companies by 2024.
The company also announced plans to introduce a new suite of global climate indices underpinned by the new ratings, for investors looking to track the Net Zero trajectory of their portfolios.
It will provide exposure to companies delivering business model transformation and managing climate transition risks.
“As the effects of climate change further materialise, companies are likely to face rising transition costs tied to decarbonizing the global economy,” said Azadeh Sabour, senior vice president of climate solutions at Morningstar Sustainalytics.
She added, “Investors are becoming more aware of these risks and need a structured way to decipher corporate transition plans to determine whether companies are prepared to deliver the required business model transformation to transition to a low carbon economy.”
While more companies are making net-zero commitments to fulfill global climate goals, Sustainalytics’ early research shows that only 25% have strong emissions reduction targets.
Further, only 8% have strong greenhouse gas (GHG) performance incentive plans, with the utilities and real estate industries leading in this area.
Based on Sustainalytics’ assessment of how these companies currently manage their reduction of GHG emissions, the world is expected to warm by 2.9 degrees Celsius, which is well above the target of 1.5 degrees Celsius under the Paris Agreement.
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