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Investing in Times of Climate Change A Global View of the Expanding Choice Available to Climate-Aware Investors
Executive Summary
Climate change is already wreaking havoc on Earth's natural systems and putting its inhabitants under
extreme stress. We are heading into the sixth mass extinction event caused by the swift and devastating
loss of biodiversity at the hands of deforestation, urbanisation, fishing, and farming. Globally, regulators
are also ratcheting up efforts to combat climate change, and the investment industry is responding in
kind with more disclosure and more-ambitious targets. The 2021 UN Climate Change Conference will
begin on 1 November. This conference will take place in Glasgow, Scotland, and is the 26th time the
United Nations will meet on climate change. At the summit, delegates including heads of state, climate
experts, and negotiators will come together to agree on coordinated action to tackle climate change.
Investors are waking up to this emergency. Over the past year, a broad consensus on the need to
address climate risk in investment portfolios has emerged. A group of 73 asset managers representing
more than a third of assets under management globally have signed the Net Zero Asset Managers
Initiative1. They have committed to supporting the goal of net zero greenhouse gas emissions by 2050 or
sooner and also to supporting investing aligned with the net zero target. At the same time, more
investors see the green transition to a low-carbon economy as an investment opportunity. Asset
managers are therefore rapidly developing new risk-management solutions, launching innovative
products, and retooling existing ones to help investors decarbonise their portfolios and invest in green
solutions.
In April 2020, Morningstar released its first-ever landscape of climate-aware investment products
available in Europe. This report will update the study and take a global view by assessing products from
Europe, the United States, Canada, and Asia Pacific. We will add insights and trends from the rest of
2020 and map out the global landscape of climate-related investment products.
Climate-aware funds represent a broad range of approaches that aim to meet varying investor needs
and preferences. We analyse them using Morningstar's suite of carbon metrics and test their claims. We
examine involvement in fossil fuels, participation in carbon solutions, carbon intensity, and carbon risk.
We also discuss how these climate-aware funds can fit into an investor's portfolio. And finally, we look
inside at their most common holdings. The purpose of this report is to help climate-aware investors
navigate the expanding array of options available to them.
1 https://www.netzeroassetmanagers.org/
Morningstar Manager Research April 2021 Contents 1 Executive Summary 2 Key Takeaways 3 Defining the Universe of Climate-Aware Funds 6 Global Summary 16 How Climate-Aware Funds Fit Into an Investor's Portfolio 17 How Do These Funds Stack Up? 26 What's Inside Climate-Aware Funds? 30 Conclusion Elizabeth Stuart Analyst Sustainability Research, EMEA [email protected] Hortense Bioy, CFA Global Director of Sustainability Research [email protected]
Important Disclosure
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of Conduct Policy, Personal Security Trading Policy (or an equivalent of), and Investment Research Policy. For information regarding conflicts of interest, please visit: http://global.morningstar.com/equitydisclosures
Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
Page 2 of 31
Key Takeaways
× As of December 2020, there were 400 mutual funds and exchange-traded funds globally that had
climate change as a key theme, with collective assets under management of USD 177 billion. Global
assets almost tripled in one year.
× Europe has the largest and most diverse universe of climate-aware funds, with 282 funds and USD 136
billion in assets, followed by the United States, with 42 funds and USD 21 billion in assets. In the rest of
the world, the biggest market is China, which accounts for USD 17.1 billion.
× The year 2020 saw major developments for climate funds, with a record 76 new launches, globally.
Europe saw the launch of nine passive Paris-aligned funds. These are index funds based on the
European Union's Climate Transition Benchmark and Paris-Aligned Benchmark.
× The climate-aware funds universe represents a broad range of approaches addressing various
sustainability and investment objectives. In this paper, we have subdivided our universe into five
categories: Low Carbon, Climate Conscious, Green Bond, Climate Solutions, and Clean Energy/Tech.
× Clean Energy/Tech has become the most popular category, holding a third of global assets at the end of
2020, boosted by significant inflows in the fourth quarter. Clean Energy/Tech and Climate Solutions
funds represent the most attractive options for investors looking to take advantage of the opportunities
created by the transition to a low-carbon economy.
× Climate-aware funds largely deliver on their promises. For example, relative to a global market
benchmark, more than 90% of Low Carbon funds do provide access to companies with lower carbon
intensity, while Climate Solutions and Clean Energy/Tech funds score high on carbon solutions.
× There are surprises. Many Carbon Solutions and Clean Energy/Tech funds carry some of the highest
carbon risk. Alongside companies that focus on providing green solutions, these funds also invest in
transitioning companies that operate in carbon-intensive sectors such as utilities, energy, and
industrials and that are developing solutions to help reduce their own carbon emissions and that of
others.
Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
Page 3 of 31
Part 1 - Defining the Universe of Climate-Aware Funds
For the purpose of this report, we have defined the global universe of climate-aware funds as those
open-end funds and exchange-traded funds that have a branded, climate-related mandate. Our list of
funds spans all key asset classes, including equity, fixed income, allocation, and alternatives.
Funds were identified only based on name, unlike for last year's study where we identified climate-
related funds based also on investment objective and policy in prospectuses. The funds in our list are
marketed as climate-themed funds using a range of terms in their names such as climate, carbon, green,
and clean energy. Although we have made every effort to identify as many of these funds as possible,
this list is not intended to be exhaustive but rather a clean sample with which to analyse the efficacy of
these funds.
In this spirit, this time we also decided to not include funds whose sole climate-related mandate is to
exclude fossil fuel companies. Globally, there are fewer than 15 funds that are branded ex-fossil fuel
(that is, with "ex-fossil fuel" in their names), but there are many more unbranded ones that equally have
the exclusion of fossil fuel as part of their mandates. For many asset managers, fossil fuel has become
part of a broader exclusion list, in addition to weapons, tobacco, and other controversial activities.
Moreover, definitions of fossil fuel exclusions tend to vary greatly, from the simple exclusion of
companies involved in thermal coal extraction and generation to no investments in companies with fossil
fuel reserves or any involvement in fossil-fuel-related activities, including exploration, production, and
distribution. While acknowledging that excluding fossil fuel is a way of decarbonising a portfolio, we
have chosen to exclude ex-fossil fuel funds from this study to ensure a well-defined and cohesive
universe of climate-aware funds.
Our universe of climate-aware funds is subdivided into five mutually exclusive groups based on
investment objective and policy, diversification, and sector exposure: Low Carbon, Climate Conscious,
Climate Solutions, Green Bond, and Clean Energy/Tech. Below is a representation of the five groupings,
with the role they can play in an investment portfolio, from decarbonising a portfolio to promoting the
transition by investing in green solutions.
Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
Page 4 of 31
Exhibit 1 Climate Strategies and Their Role in Portfolios
Source: Morningstar Research.
× Low Carbon funds seek to invest in companies with reduced carbon intensity and/or carbon footprint
relative to a benchmark index. These strategies typically offer broad market exposure across all sectors.
Examples include strategies clearly marketed as low carbon such as DNB Global Lavkarbon, Amundi IS
Equity Europe Low Carbon and the TIAA-CREF Social Choice Low Carbon Equity Fund.
× Climate Conscious funds select or tilt towards companies that consider climate change in their business
strategy and therefore are better prepared for the transition to a low-carbon economy. Climate
Conscious funds tend to invest in a mix of companies: those that positively align with the transition and
those that provide carbon solutions. Examples include Aviva Investors Climate Transition Euro Equity,
DNCA Invest Beyond Climate, and Lyxor S&P Europe Paris-Aligned Climate ETF. Climate Conscious
funds share many characteristics with both Low Carbon and Climate Solutions funds. As such, Client
Conscious represent somewhat of a hybrid group.
× Climate Solutions funds only target companies that are contributing to the transition to a low-carbon
economy through their products and services and that will benefit from this transition. For example,
Candriam SRI Equity Climate Action Fund invests in companies for which climate change solutions are
central to their growth story and whose products, processes, technologies, and/or services address
climate challenges. Wellington Climate Strategy has a similar strategy. Climate Solutions funds differ
from Climate Conscious funds in that they invest exclusively in companies whose goods and services
provide solutions for climate change mitigation and adaptation. Their sector exposure is therefore more
concentrated.
Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
Page 5 of 31
× Green Bond funds invest in debt instruments that finance projects facilitating the transition to a green
economy. The Green Bond Principles, formulated by the International Capital Market Association,
provide high-level categories for eligible green projects. The eligible categories include, but are not
limited to, renewable energy, energy efficiency, pollution prevention and control, clean transportation,
sustainable water and wastewater, climate change adaptation, eco-efficient and/or circular economy
adapted products, and green buildings. We have also included in this grouping a couple of climate bond
funds that have slightly broader mandates, including the LO Funds Global Climate Bond and the DPAM
L Bonds Climate Trends Sustainable.
× Clean Energy/Tech funds invest in companies that contribute to or facilitate the clean energy transition.
This includes renewable energies such as wind, solar, hydro, wave, and geothermal power along with
grid infrastructure improvements, transmission and distribution, energy storage, and innovative
technologies such as carbon capture and storage. Clean Energy/Tech funds are characterised as sector-
specific, are typically more concentrated than any of the first three fund groupings above, and also have
a bias towards mid- and small caps. Examples include First Trust Nasdaq Clean Edge Green Energy
Index Fund and RobecoSAM Smart Energy, which invests across renewable energy enablers and
producers, “smart-grid” distribution networks, energy efficient storage and power management
technologies, and the electrification of end-use applications.
Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
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Part 2 - Global Summary
As of December 2020, there were 400 climate-aware funds that fit our definition, with collective assets
under management of USD 177 billion worldwide. Global assets have almost tripled in one year.
Exhibit 2 Climate-Aware Funds Globally
Source: Morningstar Direct. Morningstar Research, Data as of 31 December 2020.
Europe remains the largest market for climate funds, accounting for more than three fourths of global
assets. Clean Energy/Tech funds, meanwhile, have become the largest category, taking a third of the
assets in 2020, against only 18% in 2019.
Development of Climate-Aware Funds Over Time
Although climate change and its negative effects have been recognised for decades, only in the past
four years has this become a mainstream investment theme. Investors and asset managers started
paying attention after the Paris Climate Agreement and the UN Sustainable Development Goals in 2015.
By putting the fight against climate change in the spotlight, both served as catalysts for the
development of new investment strategies. Prior to that, choice for climate-aware investors was limited
to a small number of environmental funds and niche renewable energy funds.
Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
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The year 2020 saw major development in the climate funds universe with a record 76 launches of
climate-mandated funds, globally. Especially in Europe with the implementation of the EU Action Plan on
Sustainable Finance the demand for renewable energy and climate resilient companies has ratcheted
up. The EU has launched the Paris-Aligned Benchmark and the Climate Transition Benchmark. For the
PAB, underlying assets are selected in such a manner that the resulting benchmark portfolio's
greenhouse gas emissions are aligned with the long-term global warming target of the Paris Agreement.
Similarly, for the CTB, the underlying assets are selected, weighted, or excluded to create a portfolio on
a decarbonisation trajectory in accordance with the minimum standards laid down by the European
regulator. Examples include Amundi MSCI World Climate Transition CTB and the
Lyxor S&P 500 Paris-Aligned Climate EU PAB ETF.
Europe
The European climate-themed funds landscape is by far the largest, with 77% of the global assets and
282 out of the 400 funds that we have identified for this study.
Climate funds have seen year-on-year growth, particularly from 2018 to date. The universe expanded six-
fold in the past two years to USD 136 billion. In 2020 alone, European climate funds grew by 146%. The
bulk of assets are held within Climate Solutions and Clean Energy/Tech funds.
Exhibit 3 Assets of Climate-Aware Funds in Europe
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
The significant growth in assets can be mainly explained by the huge amount of money that was poured
into these funds, especially Clean Energy/Tech funds, in the fourth quarter of 2020. Over the quarter,
more than USD 31 billion flew into this universe, with over USD 10 billion pouring into Clean
Energy/Tech funds. A distant second in terms of flows were Climate Solutions funds, showing that
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Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
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investors were really targeting those funds that provide solutions towards the transition to a low carbon
economy.
Exhibit 4 Flows of Climate-Aware Funds in Europe
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
The European universe has seen steady growth in the number of funds available to climate-aware
investors. Product development reached record highs in 2020, with 52 new products coming to market
and a special focus on climate-conscious types of strategies.
Exhibit 5 Launches of Climate-Aware Funds in Europe
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
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Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
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Notable launches in 2020 are a number of Paris-aligned funds such as the Amundi Euro iStoxx Climate
Paris Aligned PAB, Franklin STOXX Europe 600 Paris Aligned Climate ETF, and the Lyxor S&P Europe
Paris-Aligned Climate ETF. Similarly, Amundi MSCI World Climate Transition is an example of a fund
aligned with the EU Climate Transition Benchmark. Morningstar has identified nine such products
launched last year.
According to the EU, the objectives in creating these benchmarks are as follows: a significant level of
comparability of climate benchmarks while leaving benchmarks’ administrators with an important level
of flexibility in designing their methodology; provide investors with an appropriate tool that is aligned
with their investment strategy; increase transparency on investors’ alignment with the needs of
ambitious climate scenarios; prevent greenwashing.
Exhibit 6 Largest Climate-Aware Funds in Europe
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
United States
The picture in the United States is one of a slightly slower start, but similarly to Europe, strong flows in
fourth-quarter 2020 driven by Clean Energy/Tech funds and higher valuations propelled assets to close
to USD 21 billion at the end of last year. Large flows into First Trust Nasdaq Clean Edge Green Energy
ETF and the iShares Global Clean Energy ETF provided the unprecedented spike in this universe for
the US market.
Name Climate Category AUM (USD bln) Q4 2020 Flows (USD bln)
Pictet - Global Envir Opps I USD Climate Solutions 7.42 1.81Nordea 1 - Global Climate & Envir BI EUR Climate Solutions 6.73 1.33iShares Global Clean Energy ETF USD Dist Clean Energy/Tech 5.35 1.98Blackrock ACS World ESG Eq TrkrX1DGBPAcc Low carbon 4.90 0.94Handelsbanken Hållbar Energi A1 SEK Clean Energy/Tech 4.21 1.84BGF Sustainable Energy A2 Clean Energy/Tech 3.96 1.24Blackrock ACS Wld LowCarbEqTrkrX2GBPAcc Low carbon 3.64 0.74Pictet-Clean Energy I USD Clean Energy/Tech 3.56 1.55iShares Green Bd Idx (IE) D Acc EUR Green Bond 3.13 0.74RobecoSAM Smart Energy Eqs F EUR Clean energy/tech 2.91 0.53
Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
Page 10 of 31
Exhibit 7 Assets of Climate-Aware Funds in the United States
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
Exhibit 8 Flows of Climate-Aware Funds in the United States
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
The launch of climate-themed funds in the US has been slowly rising over the last eight years, with an
all-time high of eight product launches in 2020 including Lord Abbett Climate Focused Bond, Goldman
Sachs Clean Energy Income, and JPMorgan Carbon Transition US Equity ETF. The latter is designed
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Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
Page 11 of 31
to capture the performance of companies that have been identified as best positioned to benefit from a
transition to a low-carbon economy by effectively managing their emissions, resources, and climate-
related risks. The index aims to meet the requirements for EU Climate Transition Benchmarks. This is a
space to watch for the US universe. Since President Biden re-signed the Paris Agreement mere hours
after being sworn in as commander in chief, we expect to see more climate-themed fund launches in the
US going forward. These new launches bring the total of climate funds in the US to 42.
Although the US market has been dominated by Clean Energy/Tech funds, we will see more
decarbonising portfolios become available in the coming months. In April 2021, BlackRock launched a
mammoth product, the BlackRock U.S. Carbon Transition Readiness ETF, with over USD 1 billion in
assets. This is a Climate Conscious fund that chooses companies that may be better positioned to
benefit from the transition to a low-carbon economy.
Exhibit 9 Launches of Climate-Aware Funds in the United States
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
The largest climate funds available to US investors are Clean Energy/Tech funds, the largest two being
iShares Global Clean Energy ETF and the Invesco Solar ETF. They are both designed to provide
exposure to the world's leading clean-energy companies.
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Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
Page 12 of 31
Exhibit 10 Largest Climate-Aware Funds in the United States
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
Rest of World
The Rest of World group represents a small universe of climate-aware funds domiciled out of Europe and
the U.S., the bulk of which sit within China and Australia and within Clean Energy/Tech funds and Low
Carbon funds. China accounts for 87% of the assets.
Exhibit 11 Climate-Aware Funds Outside Europe and US
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
Name Climate Category AUM (USD bln) Q4 2020 Flows (USD bln)
iShares Global Clean Energy ETF Clean Energy/Tech 4.67 1.98Invesco Solar ETF Clean Energy/Tech 3.62 0.91Invesco WilderHill Clean Energy ETF Clean Energy/Tech 2.17 0.74First Trust NASDAQ® Cln Edge® GrnEngyETF Clean Energy/Tech 1.99 0.98Pax Global Environmental Mrkts Instl Climate Solutions 1.62 0.22ALPS Clean Energy ETF Clean Energy/Tech 0.78 0.18Calvert Green Bond I Green Bond 0.76 0.14iShares MSCI ACWI Low Carbon Target ETF Low Carbon 0.62 0.07TIAA-CREF Social Choice LwCrbn Eq Instl Low Carbon 0.56 0.06Invesco Cleantech™ ETF Clean Energy/Tech 0.46 0.08
Domicile No. of Funds AUM (USD billion)China 38 17.11
Australia 14 1.17
Canada 1 0.95
Singapore 6 0.30
Japan 4 0.17
South Korea 9 0.06
India 1 0.03
Taiwan 2 0.01
Indonesia 1 0.00
Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
Page 13 of 31
Exhibit 12 Assets of Climate-Aware Funds in Rest of World
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
A similar story to Europe and the US played out across the globe as we saw strong flows into the
climate-aware universe in fourth-quarter 2020. These again were dominated by Clean Energy/Tech
funds.
The largest 11 funds in terms of flows are all domiciled in China, and nine of these are Clean
Energy/Tech funds. The three funds with the largest flows are the ABC-CA New Energy Theme Mix,
the ChinaAMC Energy Innovation Equity, and the Orient Secs Green Energy Car fund. Smart cars and
green vehicles are a common theme in China with eight funds focused on the theme including the
ICBCCS Green Energy Car Theme Allocation Fund that invests in companies benefiting from the
theme of new energy vehicles.
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Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
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Exhibit 13 Flows of Climate-Aware Funds in Rest of World
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
The launch of products in the rest of the world has also been slowly rising over the last eight years, with
an all-time high of 16 climate-aware products launched in 2020 including the Desjardins RI Dev ex
USA ex Canada Low CO2 ETF in Canada, the Artesian Green & Sustainable Bond in Australia, and
the MAXIS Carbon Efficient Japan Equity ETF in Japan. Six of the funds launched in 2020 are
domiciled in China.
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Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
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Exhibit 14 Launches of Climate-Aware Funds in Rest of World
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
The 10 largest climate-aware funds outside of Europe and the US are domiciled in China. Seven of these
are Clean Energy/Tech funds. Of the 20 largest funds,18 are domiciled in China. This correlates with
China's recent commitment to hit peak CO2 emissions by 2030 and achieve net zero by 2060. President
Xi Jingping has taken a proactive stance, pouring investment into renewable energy to meet this lofty
goal. The move away from coal due to both climate change and air-quality concerns has been slower
than ideal, with the lure of cheap, reliable coal-powered energy seemingly still too strong.
Exhibit 15 Largest Climate-Aware Funds in Rest of World
Source: Morningstar Direct. Morningstar Research. Data as of December 2020.
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Name Domicile Climate Category AUM (USD bln)
Q4 2020 Flows (USD bln)
ABC-CA New Energy Theme mix China Clean Energy/Tech 1.91 1.55First State Cinda New Energy Ind Stk Fd China Clean Energy/Tech 1.57 -0.15ChinaAMC Energy Innovation Eq China Clean Energy/Tech 1.30 0.87Fullgoal China Secs new energy vehicles China Clean Energy/Tech 1.03 -0.05HSBC Jintrust Carbon Awareness Equity Fd China Climate Conscious 0.93 0.35Ping An Low Carbon Economy Alloc A China Low Carbon 0.92 0.00Fullgoal Low Carbon New Econ Alloc A China Low Carbon 0.83 0.14Harvest Envirnmt low-carbon Stk China Clean Energy/Tech 0.74 -0.03Ping An-UOB CSI New En Car Ind ETF China Clean Energy/Tech 0.60 -0.16Orient Secs Green Energy Car Alloc China Clean Energy/Tech 0.59 0.49
Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
Page 16 of 31
Part 3 - How Climate-Aware Funds Fit Into an Investor's Portfolio
The five climate-aware fund groupings we have identified represent a broad range of approaches
globally that aim to meet different investor needs and preferences. The choice of one type over another
largely depends on an investor's investment goals, risk appetite, and preferences.
Exhibit 16 Climate Strategies and Their Role in Portfolios
Source: Morningstar Research.
Investors concerned about climate-related risks can use Low Carbon funds to decarbonise their
portfolios. As we will see in Part 4, these approaches provide broad and diversified exposure to the
market. They are therefore suitable as part of a portfolio core allocation. In fact, within an asset
allocation, Low Carbon funds can substitute for a lot of core equity exposure, but it would be a mistake
to believe these are investments in the transition to a low-carbon economy. For that, investors must
choose among the remaining types.
Investors looking to take advantage of this transition can turn towards Climate Conscious funds. These
typically exhibit low carbon risk−like Low Carbon funds−with the added benefit of higher Carbon
Solutions Involvement. These are suitable for investors wanting to strike a balance between mitigating
risk and looking to benefit from the green transition.
Further along the risk-opportunity spectrum, Climate Solutions and Clean Energy/Tech strategies can
appeal to investors with a greater risk appetite and who consider climate change as an alpha-generating
opportunity. Because of their narrower market exposure and often mid- and small-cap bias, Climate
Solutions and Clean Energy/Tech funds represent more-volatile investments. Sharp price fluctuations in
the clean energy sector over the past six months are testament to this. After registering their best
annual performance last year, with returns of up to more than 200%, Clean Energy/Tech funds have
Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
Page 17 of 31
lagged the market so far this year, with clean energy ETFs falling by up to 25% from their peak valuation
in January.
Climate Solutions and Clean Energy/Tech funds also currently often come with higher carbon risk. We
have seen this begin to change gradually as the transitioning companies implement their solutions.
Given their less diversified and higher risk profile, Climate Solutions and Clean Energy/Tech funds are
more suitable as part of a satellite allocation to complement rather than replace existing core holdings.
Meanwhile, Green Bonds may be inherently lower risk, but investors must be sure that the projects
sitting within the bonds are indeed providing green solutions, as many green-bond issuers have high
exposure to traditional brown industries such as those involved with thermal coal. Ideally, in the coming
years, we would like to see increased disclosure on Green Bond projects and how they serve to lower
the environmental impact of their issuer in a material way. For instance, a distribution company issuing a
green bond to electrify its fleet has greater impact in the issuer than an oil and gas firm issuing a green
bond to electrify warehouse operations.
Part 4 - How Do These Funds Stack Up?
In this section, we analyse our list of funds by climate strategy type to ascertain how they compare
against one another and whether they deliver what they claim to deliver. For example, do Low Carbon
funds actually exhibit lower exposure to high-carbon-emitting companies relative to a broad market
benchmark index? Do Climate Solution and Clean Energy/Tech funds score high on carbon-solution
metrics? Do these give investors access to companies that provide products and services that address
climate challenges?
The next few exhibits compare the five climate strategy groups using the following Morningstar metrics:
Carbon Intensity, Fossil Fuel Involvement, Oil & Gas Production Involvement, Thermal Coal Involvement,
Carbon Solutions Involvement, and Carbon Risk. For each one, Morningstar uses Sustainalytics’
company-level carbon metrics, which it aggregates at the fund's level on an asset-weighted basis.
Additionally, we plot the Morningstar Global Target Market Exposure Index2, which we chose as the
market benchmark. We couldn't use the funds' respective benchmarks because of data availability. In
this test, a low percentage is optimal (except for the Carbon Solutions Involvement, for which a high
percentage is better).
Carbon Intensity
First, we test each fund's level of carbon intensity, which is computed for each holding as follows: Total
Emissions (metric tons of Co2) / Revenue (Mil USD), and aggregated at the fund level. Sustainalytics
2 The Morningstar® Global Target Market Exposure Index is designed to provide exposure to the top 85% market capitalization by free float in each of two economic segments, developed markets and emerging markets. Together, these two economic segment indexes make up the Global Target Market Exposure Index.
Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
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looks at the latest reported Scope 1 (direct emissions from owned or controlled sources) and Scope 2
(indirect emissions from the generation of purchased energy). A lower score is better.
Each marker in Exhibit 17 represents a fund and its carbon intensity. The callout boxes display the
percentage of funds in each climate strategy group that exhibit lower carbon intensity than the
Morningstar Global Target Market Exposure Index.
Exhibit 17 Carbon Intensity for All Fund Groups vs. Morningstar Global Target Market Exposure Index
Source: Morningstar Direct. Morningstar Research. Data as of March 2021. For Green Bonds, the analysis is carried out at issuer level, not on the issuance itself.
Of 207 funds with Carbon Intensity numbers, 113, or 54%, offer an improvement on the benchmark. The
majority of these are Low Carbon and Climate Conscious funds.
By contrast, most Climate Solutions and Clean Energy/Tech funds exhibit higher Carbon Intensity scores
than the Morningstar Global Target Market Exposure Index. This reflects the fact that alongside pure-
plays in the renewable energy sector like wind turbine manufacturers Siemens Gamesa Renewable
Energy and Vestas Wind Systems, which score low on Carbon Intensity, many Climate Solutions and
Clean Energy/Tech portfolios invest in more-diversified companies that operate carbon-intensive
businesses. An example is SSE, which develops and operates renewable energy across the UK and
Ireland but also generates over two thirds of electricity from gas/oil and coal. NextEra Energy, a leading
wind farm and solar builder and operator in the US, exhibits high Carbon Intensity because its
generating capacity is still more than half fossil fuels. In contrast, Denmark's Orsted, one of the world's
largest renewable energy companies, carries 99.15% of its energy mix in renewables3. This was achieved
through major investment in wind energy—EUR 23 billion projected by the end of 2021.
3 https://orsted.co.uk/business/sustainable-energy/our-fuel-mix
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It is crucial to understand that Carbon Intensity is a normalised metric, dependent on both carbon
footprint and revenue. Large-cap equity stocks can often have a lower Carbon Intensity because of
higher revenue and low Scope 1 emissions4 when compared with the type of industrial companies that
would be involved in engineering green energy solutions.
Fossil Fuel Involvement
Next, we test the exposure of climate-aware funds to fossil-fuel companies. For this, we use the
Morningstar Portfolio Fossil Fuel Involvement metric, the percentage of the fund’s assets that are
involved in fossil fuels. Companies are considered involved in fossil fuels if they derive at least an
aggregate 5% share of total revenue from the following activities: thermal coal extraction, thermal coal
power generation, oil and gas production, and oil and gas power generation. Companies deriving at
least 50% of their revenue from oil and gas products & services are also included. Companies involved in
arctic oil & gas exploration and oil sands extraction will be included only if there is no involvement in oil
& gas production.
Each marker in Exhibit 18 represents a fund and its involvement in fossil fuel. A lower involvement
percentage is optimal.
Exhibit 18 % Fossil Fuel Involvement vs. Morningstar Global Target Market Exposure Index
Source: Morningstar Direct. Morningstar Research. Data as of March 2021. For Green Bonds, the analysis is carried out at issuer level, not on the issuance itself.
Over 80% of Climate Conscious and over 70% of Climate Solutions funds also have lower Fossil Fuel
Involvement than the index. However, only 52% of Clean Energy/Tech funds meet this criterion. This is
because, as previously mentioned, many Clean Energy/Tech portfolios invest in utilities companies that
have built large renewable energy operations but still operate their legacy fossil-fuel businesses. To
4 Scope 1 describes direct emissions from owned or controlled resources. Scope 2 describes indirect emissions from purchased electricity. Scope 3 describes all other indirect emissions that occur in a company's value chain, including business travel and procurement.
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provide further examples, Iberdrola, EDP Renováveis, and Enel derive between 25% and 50% of their
revenues from fossil-fuel activities. Additionally, a few Clean Energy/Tech funds hold energy companies
like Neste, which produces renewable fuels, but oil products remain its largest contributor of revenue.
Similarly, only 21% of Green Bonds beat the benchmark, as many companies that issue green bonds are
transitioning away from traditional forms of energy.
Oil & Gas Production Involvement
We now test the exposure of climate-related funds to oil & gas production. Oil & Gas Production
Involvement is the portfolio's asset-weighted exposure to companies that derive at least 5% of revenue
from oil & gas production, exploration, transportation, storage, and refining.
Each marker in Exhibit 19 represents a fund and its involvement in oil & gas production. A lower
involvement percentage is optimal.
Exhibit 19 % Oil & Gas Production vs. Morningstar Global Target Market Exposure Index
Source: Morningstar Direct. Morningstar Research. Data as of March 2021. For Green Bonds, the analysis is carried out at issuer level, not on the issuance itself.
The vast majority of funds in our list have lower exposure to oil & gas producers than the benchmark,
which at the end of March 2021 amounted to 4.05%. Only 16% of Green Bond funds keep their Oil & Gas
Production Involvement below the benchmark's.
Thermal Coal Involvement
Here, we test the exposure of our list of funds to one of the most carbon-intensive energy sources. Each
marker in Exhibit 20 represents a fund and its involvement in thermal coal.
Thermal Coal Involvement tracks the percentage of a company’s generating capacity based on coal
(instead of revenue like the other carbon metrics). Companies with Thermal Coal Involvement are
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defined as those that extract thermal coal for coal mining and exploration (direct involvement) and those
that generate electricity from thermal coal, including utilities that own or operate coal-fired power plants
(indirect involvement). On a lifecycle basis, thermal coal is the most carbon-intensive fossil fuel source,
while from an energy-generation perspective, it is easily substitutable. In this test, again, a lower
involvement percentage is optimal.
Exhibit 20 % Thermal Coal Involvement vs. Morningstar Global Target Market Exposure Index
Source: Morningstar Direct. Morningstar Research. Data as of March 2021. For Green Bonds, the analysis is carried out at issuer level, not on the issuance itself.
Most notable is the high level of Thermal Coal Involvement with Green Bond funds, with only 30%
beating the benchmark. But this is unsurprising given the relatively high exposure of these funds to
traditional utilities companies that are looking to access new capital to finance green projects, which
would allow them to transition away from their highly intensive coal-fired electricity generation
activities.
The other grouping with high exposure to thermal coal is Clean Energy/Tech. Half of these funds exhibit
higher Thermal Coal Involvement than the Morningstar Global Target Market Exposure Index.
Low Carbon and funds exhibit a much lower level of Thermal Coal Involvement, with almost 80% of them
having a lower involvement than the Morningstar Global Target Market Exposure Index.
Carbon Solutions Involvement
Here, we analyse how much exposure to climate solutions investors can expect from climate-aware
funds. Morningstar's Carbon Solutions Involvement is defined as a fund's asset-weighted percentage
exposure to carbon solutions, including renewal energy production, renewal energy supporting products
& services, and green transportation. Holdings are considered involved with carbon solutions if they
have at least 0.1% exposure.
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Each marker in Exhibit 21 represents a fund and its Carbon Solutions Involvement. In this test, a higher
involvement percentage is optimal.
Exhibit 21 % Carbon Solutions Involvement vs. Morningstar Global Target Market Exposure Index
Source: Morningstar Direct. Morningstar Research. Data as of March 2021. For Green Bonds, the analysis is carried out at issuer level, not on the issuance itself.
As expected, the funds offering the highest exposure to carbon solutions are Clean Energy/Tech and
Climate Solutions, although the level of involvement across offerings varies greatly. Climate Conscious
funds follow closely behind. By contrast, only about half of Low Carbon funds beat the global market
benchmark in terms of carbon solutions exposure. By excluding or reducing exposure to fossil fuel
companies, Low Carbon funds may be missing out on exposure to carbon solutions as these companies
are increasingly developing products and services that address climate change.
Carbon Risk
Finally, we examine the carbon risk embedded in each climate strategy type. At company level, Carbon
Risk scores indicate the degree to which a company’s economic value is at risk in the transition to a low-
carbon economy. Unlike the involvement metrics used in our previous tests, which are purely
quantitative, Carbon Risk scores are the result of a qualitative analytical process performed by
Sustainalytics' analysts. To calculate the portfolio Carbon Risk scores, Morningstar uses Sustainalytics’
company Carbon Risk Ratings, which indicate the risk that companies face from the transition to a low-
carbon economy. At least 67% of portfolio assets must have a Carbon Risk Rating from Sustainalytics in
order for a score to be calculated. The percentage of assets covered is rescaled to 100% before
calculating the score.
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Carbon Risk goes beyond traditional carbon footprinting, taking account of management actions to
mitigate a firm’s carbon risk5. Sustainalytics arrives at a company’s Carbon Risk Rating by evaluating
carbon intensity, fossil fuel involvement, stranded assets exposure, mitigation strategies, and green
solutions. At the fund level, a Carbon Risk score is the asset-weighted Carbon Risk score of the equity or
corporate bond holdings in a fund.
Each marker in Exhibit 22 represents a fund and its Carbon Risk score. A lower score is optimal.
Exhibit 22 Carbon Risk Score of All Fund Groups vs. the Morningstar Global Target Market Exposure Index
Source: Morningstar Direct. Morningstar Research. Data as of March 2021. For Green Bonds, the analysis is carried out at issuer level, not on the issuance itself.
The fund groups with the lowest Carbon Risk scores are Climate Conscious and Low Carbon. On the
other hand, Climate Solutions and Clean Energy/Tech funds tend to carry more carbon risk. This is
because alongside companies that focus on providing green solutions, Climate Solutions and Clean
Energy/Tech funds also invest in more diversified businesses that are at different stages of their
transition journey. These are companies operating in carbon-intensive sectors like industrials, utilities,
energy, and materials that are developing solutions to help reduce their own carbon emissions and that
of others.
Exhibit 23 plots all the funds in our list on the basis of their Carbon Solutions Involvement and Carbon
Risk scores. Exhibit 24 plots the average fund in each grouping.
5 https://www.morningstar.com/lp/measuring-transition-risk.
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Exhibit 23 Relationship Between Carbon Solutions Involvement and Carbon Risk
Source: Morningstar Direct. Morningstar Research. Data as of March 2021.
Exhibit 24 Relationship Between Carbon Solutions Involvement and Carbon Risk - Averages
Source: Morningstar Direct. Morningstar Research. Data as of March 2021. For Green Bonds, the analysis is carried out at issuer level, not on the issuance itself.
As shown in Exhibit 23, the majority of Clean Energy/Tech funds sit on the upper-right-hand side of the
graph, which signals that diversified exposure to renewable energy is often achieved by taking some
extra carbon risk. Carbon Solutions funds land underneath, carrying more carbon risk on average than
the rest of the groupings, as shown also in Exhibit 24. This supports a common narrative that the
companies trying to solve the carbon challenge are often operating in the most carbon-intensive sectors.
These are the transitioning companies; over time, as they develop and implement their solutions, they
should see their Carbon Risk decrease. That said, it is still possible to find funds that score high on
Investing in Times of Climate Change | April 2021 | See Important Disclosures at the end of this report.
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Carbon Solutions Involvement, while keeping a lid on their Carbon Risk. Examples include the Ecofin
Global Renewables Infrastructure fund and the Raiffeisen-SmartEnergy-ESG-Aktien Fund.
What About Broader Environmental, Social, and Governance Concerns?
Although climate change is the chief concern for these funds, many investors will also want to keep a
check on broader ESG concerns such as social or other environmental considerations. In Exhibit 25, we
assess the universe of climate-aware funds against the Morningstar Sustainability Rating, commonly
referred to as the "globe rating." The globes are a rating of ESG risk present in the portfolio normalised
on a peer-relative basis. There is a clear skew towards strong ESG risk management in this cohort, with
70% of funds we are able to rate scoring 4 or 5 globes. A globe rating will be generated if there is
sustainability data available for more than 67% of the portfolio for 12 months trailing. There are 100
funds in this sample that are not rated because of lack of coverage.
Exhibit 25 Globe Rating of Climate-Aware Funds - Total Universe
Source: Morningstar Direct. Morningstar Research. Data as of March 2021.
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Part 5 - What's Inside Climate-Aware Funds?
In this section, we look inside climate-aware funds and examine the most commonly held companies in
each grouping as well as their sector, style, Morningstar Rating, Carbon Risk Rating, and Carbon
Solutions Involvement.
Following is a list of the 20 companies most commonly held in Low Carbon funds.
Exhibit 26 Most Commonly Held Companies in Low Carbon Funds
Source: Morningstar Direct. Sustainalytics. Data as of March 2021.
Low Carbon funds tend to be well-diversified portfolios with broad sector and stock exposure. All but
one of the 20 most represented stocks are large caps, while 18 falls into Carbon Risk categories of
Negligible or Low, as expected.
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Exhibit 27 Most Commonly Held Companies in Climate Conscious Funds
Source: Morningstar Direct, Sustainalytics. Data as of March 2021.
As seen previously, Climate Conscious funds share many characteristics with Low Carbon and Climate
Solutions funds. They also share many common holdings with these two groupings. Schneider Electric,
Umicore, Vestas Wind Systems, and Orsted are popular names found in Climate Solutions portfolios,
while Microsoft and AXA are commonly held by Low Carbon portfolios.
Furthermore, Climate Conscious funds represent mostly large caps but a mix of Carbon Risk scores.
Fourteen out of the 20 most popular stocks in this grouping are Negligible or Low; the rest fall under the
Medium category.
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Exhibit 28 Most Commonly Held Companies in Climate Solutions Funds
Source: Morningstar Direct, Sustainalytics. Data as of March 2021.
Climate Solutions funds are typically more concentrated at the sector level than any of the previous
three groupings, and this is well reflected here. Industrial companies dominate the league table of the
20 most commonly held stocks in Climate Solutions funds. However, additional sectors, including
technology, utilities, basic materials, as well as consumer cyclical, healthcare, and real estate (which
don’t appear in the table) make Climate Solutions funds still more diversified than Clean Energy/Tech
funds. Many Climate Solutions portfolios also tend to have a mid-cap and/or growth tilt.
On the Carbon Risk front, only one stock falls into the Negligible category, 13 are Low, and four are
Medium. (Note that Itron and SolarEdge Technologies do not have Carbon Risk Ratings as Sustainalytics'
coverage of small caps and mid-caps is more limited than that of large caps.)
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Exhibit 29 Most Commonly Held Companies in Clean Energy/Tech Funds
Source: Morningstar Direct, Sustainalytics. Data as of March 2021.
Clean Energy/Tech funds tend to be concentrated at the sector level, with technology, industrials, and
utilities representing the three main sectors. Small caps and mid-caps account for 35% of the top 20
most commonly held stocks. While this proportion is similar to what we see in the Climate Solutions'
table, it has decreased from 60% last year. This speaks to the rapid growth of these companies. For
example, Siemens Gamesa Renewable Energy has grown from mid-cap to large-cap status. Among
smaller companies, Canadian Solar and Sunrun have both stepped up from small cap to mid-cap. Growth
stocks make up 40% of the top 20.
In the previous section, we saw that Clean Energy/Tech portfolios typically carry higher carbon risk than
other types of climate-related strategy. Out of the 11 stocks with a Carbon Risk score, six are Negligible
or Low, while five have are Medium.
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Conclusion
The menu of options for climate-aware investors globally has expanded considerably in recent months
and will continue to expand as asset managers strive to help reorient capital towards more climate-
friendly investments, in line with the ambition of the EU Action Plan on Sustainable Finance and the
Biden administration. More choice and better information on the carbon characteristics of their
investments will help investors meet their climate goals. In the early part of 2021, we have seen the
implementation of the Sustainable Finance Disclosure Regulation, which, at least in Europe, will foster
greater transparency and combat greenwashing. We also expect SFDR to have a ripple effect across the
globe given how many asset managers have a varied portfolio in multiple domiciles.
When choosing a climate product, investors should carefully consider their green preferences and
carbon risk appetite. As we have seen, Low Carbon funds provide the greatest shield from carbon risk
but will offer little in the way of carbon solutions. Conversely, Clean Energy/Tech funds offer high
exposure to carbon solutions as expected but also currently hold the greatest carbon risk in the bunch.
This, however, should not put investors off. The rationale for investing in solutions is not only to profit
from their potential success but also to help provide the capital and support to bring those solutions into
being. If these companies are able to do so successfully, they will have sidestepped their carbon risk in
the process.
It is important that investors do their homework. They should understand the funds' investment
objectives and how the portfolios are constructed, ensure they are comfortable with the level of carbon
exposure, and, crucially, look at the funds' holdings to avoid any bad surprises. Investors should also
bear in mind that some climate change investment strategies can result in narrow and concentrated
portfolios, which makes them more suitable as satellite holdings than as core parts of a portfolio.
Climate-aware funds also have a relatively short history, with most launched in the past two to three
years, making their performance hard to assess.
Over the past year, a broad consensus on the need to address climate risk in investment portfolios has
emerged. A group of 73 asset managers representing more than one third of assets under management
globally has signed the Net Zero Asset Manager Initiative. They have committed to supporting the goal
of net zero greenhouse gas emissions by 2050 or sooner and also to supporting investing aligned with
the net zero target. We expect to see more climate-aware funds launching and more conventional funds
repurposing to a climate mandate in the coming months to keep pace with these commitments. As
companies are being asked to disclose more fulsome and accurate data, we can expect funds with a
climate-related mandate to become clearer in their missions and more accountable to investors. This
report is a snapshot of the current state of play, but we expect this universe will fluctuate. Morningstar
will continue to monitor its progress. K
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About Morningstar Manager Research
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