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Using the New Portfolio Carbon Metrics

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Employee
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Morningstar OfficeSM Cloud and the Morningstar DirectSM Cloud editions recently introduced portfolio carbon metrics. These data points offer a unique insight into a fund’s exposure to a changing world economy, and the impact of portfolio holdings on the environment. You can read more about why this information has become an important consideration for investors and the methodology behind the metrics, but this article focuses on how to find the new data points and some tips on how to best use them.

It’s also important to understand the distinction between the Morningstar® Sustainability RatingTM (introduced in 2016), and the new Morningstar® Low Carbon DesignationTM. Because the Sustainability Rating is a rating, it is by necessity a relative value among investments (in this case, in the same Morningstar Category). The Low Carbon Designation, in contrast, is an absolute measure of how well management of companies held in portfolios prepare for the transition to a low- carbon economy by reducing fossil fuel exposure and developing green solutions.

While dozens of portfolio carbon metrics are available, none appear by default in a pre-built column set. Therefore, you need to create a column set to see them in the Grid View component. An easy way to find all portfolio carbon-related data points is to search for just two terms: “carbon,” and “fossil.” Then, simply add any or all data points you would like to see in the column set. To start, you might want to add all data points. Once you understand what each one shows, you can edit the column set, keeping just a smaller set of data points, or create multiple portfolio carbon column sets. Consider, too, using the Nest icon in the Column Set Management window, to group related data points under a common header.

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Three key portfolio carbon metrics data points to note are the Low Carbon Designation, the Morningstar® Portfolio Carbon RiskTM Score, and Fund Fossil Fuel Involvement. In addition to adding these data points to a custom column set, you also want to be sure the Carbon Risk Score and Fund Fossil Fuel Involvement data points are configured to display exactly the information you want to see. By default, these two data points show their current values, which are calculated quarterly. However, because these two data points are the inputs for determining whether a fund receives the Low Carbon Designation, you might want to edit the data points to show the Calculation Type as the 12 Month Average, which is used to determine whether a fund receives the Low Carbon Designation. This setting could also be useful when using these data points in a screen.

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Finally, note that several portfolio carbon metrics are available outside of the Grid View component. When you open a fund’s Morningstar® Report, scroll to the bottom of the Portfolio area to see the Low Carbon Designation. (Note: Not all funds receive the Low Carbon Designation.) This area shows a fund’s Carbon Risk Score and Fossil Fuel Involvement percentage values as well as how they compare to the fund’s category average, and the high and low values for the fund’s category.