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How to Address Climate Risk in Your Portfolio

Director of sustainable investing Jon Hale suggests several tactics for getting your arms around the issue.

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Jon Hale: Hi, I'm Jon Hale, Morningstar's director of sustainable investing. As we continue to experience more frequent extreme weather events, it seems like climate change has really started to hit home, and as a result, opinions are shifting. A survey by the University of Chicago found that 70% of Americans believe climate change is real, and many said first-hand experience of extreme weather events did the most to shape their views. So, it comes as no surprise that I'm getting more questions from fund investors about how they can address climate risk in their portfolios.

Well, your first move is to try to get a hand on the climate risk in your current holdings. Easier said than done, but at Morningstar, we have a measure called carbon risk that's based on an assessment of how carbon emissions and the societal shift away from carbon may affect a company financially. We roll that information up to the portfolio level. If you own a value-leaning stock fund, a large-cap core U.S. fund, or an international fund with Asia or emerging-markets exposure, chances are your fund is exposed to carbon risk.

To find out more about what your fund manager is thinking on climate change, there's one really simple thing you can do. Use a search engine to check their websites and other public comments. If you can't find anything, to me, that's a giant red flag. It means your fund manager has had nothing to say publicly about this issue that's reaching crisis proportions and has clear investment implications.

To find a fund that has lower carbon risk, you can lean toward funds that employ a growth-leaning investment style, because they tend to avoid industries with the most carbon risk. Or you can look for diversified low-carbon funds such as TIAA-CREF Social Choice Low Carbon Equity or the SPDR S&P 500 Fossil Fuel Reserve Free ETF.

Finally, you can look for funds that receive our low-carbon badge, which means they have low carbon risk and low fossil fuel exposure. There are 102 such funds in the large-blend category alone, including the Silver-rated Parnassus Core Equity and Vanguard FTSE Social Index funds.

It's hard to say exactly how and when climate risks will manifest themselves in portfolios. But one thing is sure; in today's climate, you want fund managers who are on top of it.

For Morningstar, I'm Jon Hale. Thanks for watching.

Jon Hale does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.