Morningstar adds low carbon transition ratings

Morningstar Sustainalytics has launched its Low Carbon Transition Ratings, designed to provide investors with companies’ alignment to net-zero.

Morningstar Sustainalytics currently provides low carbon transition ratings coverage for around 4,000 of the largest public companies and plans to expand to include over 12,500 companies by 2024. Morningstar say the ratings give investors information to help identify and manage transition risks, respond to global regulatory requirements and disclosure initiatives, build climate investment strategies, and advance engagement activities.

Features of the Low Carbon Transition Ratings:

Expressed as an Implied Temperature Rise, the Low Carbon Transition Ratings offer investors a contextual signal that shows a company’s exposure to transition risks and opportunities based on its business model, emissions, and management performance. The ratings are also based on the outcomes of scenario analysis from the PRI-commissioned Inevitable Policy Response (IPR) and include more than 85 management indicators weighted by GHG emissions and grouped by TCFD themes. Investors can also determine the scope and quality of a company’s climate risk disclosure with a TCFD module built into the research.

The Required Policy Scenario (1.5 degrees Celsius RPS) from the IPR used in the methodology shows the policies and actions needed to keep global warming below 1.5 degrees Celsius beyond the current stated policies. The RPS is based on the International Energy Association’s Net-Zero scenario, which covers a broad range of sectors and is based on assumptions about technological advances and land use change. Morningstar Sustainalytics downscales and reconciles the 1.5 degrees Celsius RPS to a company-specific net-zero budget that considers the location of a company’s operations and business activities.

Azadeh Sabour, senior vice president of Climate Solutions at Morningstar Sustainalytics says, “As the effects of climate change further materialize, companies are likely to face rising transition costs tied to decarbonizing the global economy. 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. Leveraging the consistent framework behind our Low Carbon Transition Ratings, investors can benefit from a distinct signal to understand the most material aspects of a company’s transition plans and how they compare across industries and geographies.”