Russian Stock Market at Risk From Climate Change Policy

Unsurprisingly, the energy heavy stock market of Russia carries the largest carbon risk while Australian companies fair well

Dan Lefkovitz 4 October, 2018 | 8:45AM
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Morningstar's Carbon Metrics allow investors to examine the environmental impact and the risks posed by climate change to their portfolios.

Carbon Intensity measures a portfolio's carbon footprint by gauging greenhouse gas emissions per millions of dollars of revenue. Carbon Risk relies on Sustainalytics' assessment of the degree to which corporate value is at risk from climate change and the shift away from fossil fuels. So, Carbon Intensity provides the current picture, while Carbon Risk is forward-looking.

Map of Carbon Intensity Scores

To compute Carbon Intensity, Sustainalytics looks at companies' total greenhouse gas emissions per millions of dollars of revenue. The world's least-carbon-intensive equity markets include Peru and the United Arab Emirates owing to the small carbon footprints of the banks, telecoms, and property companies that dominate those indexes.

Sustainability Atlas Carbon Intensity Scores Map ESG responsible investing climate change

Developed Asian markets Singapore and Japan have low carbon footprints relative to the sizes of their businesses, as do most Western European markets, with Sweden scoring highest. Fossil-fuel-heavy economies Canada and Russia also look carbon intensive at the corporate level.

Chinese, U.S., and Brazilian companies do not have an especially large carbon footprints given the size of their companies. Indian companies look quite carbon intensive, though India's broader Environmental Score is around the global midpoint. The most-carbon intensive country is the Czech Republic, unsurprising given that a utility, CEZ, dominates its index.

Map of Carbon Risk Scores

Carbon Risk assesses the degree to which corporate value is at risk from the transition to a low-carbon economy. Companies with low levels of carbon risk, as assessed by Sustainalytics, are best poised to survive and thrive as the world moves away from fossil fuels.

Sustainability Atlas Carbon Risk Scores Map ESG responsible investing climate change

Companies can face a range of carbon related risks. Climate change might threaten their physical assets or their business model. They may be impacted by policy or regulation aimed at lowering greenhouse gas emissions; their fossil fuel assets may be stranded; or changing popular perception may damage their brand.

Certain economic sectors are inherently risky. Energy is judged to be the riskiest by far, followed by utilities, materials, and industrials. At the low end of the carbon risk spectrum are healthcare and technology.

The Sustainability Atlas measures country indexes based on the weighted average Carbon Risk level of their constituent companies. Western European markets including Switzerland, the Netherlands, and France carry low levels of carbon risk, as do Japan, Korea, Taiwan, and Hong Kong.

Surprisingly, given that the U.S. is a heavy emitter of greenhouse gases, a low level of U.S. stock market value is at risk from the transition to a low-carbon economy. This owes to the fact that healthcare and technology companies represent more than one third of U.S. equity market cap; energy is less than 6%.

On the flip side is Russia, with nearly 60% of its market cap in energy stocks and the world's highest level of carbon risk. Also carrying significant carbon risk are energy-heavy markets Poland and Canada, as well as Chile, with its significant basic-materials exposure.

Australian companies are doing a good job managing carbon risk, given the market's fairly high level of Carbon Intensity. South Africa and Mexico are similar stories. By contrast, Singapore, Peru, and the United Arab Emirates post low Carbon Intensity Scores but look riskier on a forward-looking basis.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Dan Lefkovitz

Dan Lefkovitz  is strategist for Morningstar’s Indexes group