The Takeaway
The Morningstar US and Developed Markets Low Carbon Transition Leaders Indexes outperformed their parent benchmarks in 2024, driven largely by the technology and communications sectors.
In 2024 the Morningstar US and DM Low Carbon Transition Leaders Indexes improved relative to their parent benchmarks across all three key measures that they target: Carbon Emissions Intensity, Green Revenue, and Low Carbon Transition Management Score.
The indexes enable a more nuanced approach to transition investing enabled through differentiation between companies particularly, those in high-emitting sectors, through their use of Sustainalytics’ forward-looking Low Carbon Transition Management Score criteria, and green revenues.
Morningstar’s Low Carbon Transition Leaders Indexes represent a unique approach for investors looking for exposure to companies managing climate transition risks. Unlike traditional ESG and low carbon strategies that exclude or underweight high emitting sectors like Energy and Utilities, the Low Carbon Transition Leaders Index focuses on companies within those sectors that have credible transition plans, emissions reduction strategies, and green revenues providing a more balanced sector distribution.
By incorporating forward-looking dimensions such as board accountability and investment alignment to emissions goals, the Index enables a diversified, low-carbon strategy that mitigates trade-offs typically seen in other climate-focused investment approaches. In 2024, the US and Developed Markets Low Carbon Transition Leaders Indexes exhibited performance characteristics such as a lower tracking error, higher risk-adjusted returns, and more stable performance during both upward and downward market trends compared to its parent benchmark. This paper highlights how the Low Carbon Transition Leaders Index can offer a promising pathway for investors aiming to align portfolios with the global low-carbon transition while maintaining strong correlation with the broad market.
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