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Low Carbon Transition Ratings

Align your portfolio to a net-zero pathway

Low Carbon Transition Ratings

Mandatory climate-related financial disclosure is becoming a universal reality, with more governments around the world adopting the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and other leading expert groups. In parallel, companies are setting targets and developing strategies to do their part in meeting the global objective of minimizing global warming to 1.5°C by 2050.

Morningstar Sustainalytics’ Low Carbon Transition Ratings provide investors with a forward-looking assessment of a company’s current alignment to a net-zero pathway.

Leveraging our Low Carbon Transition Ratings, investors can respond to regulatory initiatives, implement net-zero strategies, fulfill client net-zero mandates, and obtain transparency into company actions by integrating climate research into their investment decision-making processes.

Overview of Sustainalytics’ Low Carbon Transition Ratings

Our comprehensive framework measures the degree to which a company’s projected greenhouse gas (GHG) emissions differ from a net-zero pathway between now and the year 2050. The ratings leverage a two-dimensional framework that measures an issuer's exposure from their expected emissions, while also accounting for management actions. They assess the company's progress toward their stated net-zero commitments by evaluating the quality and ambition of their GHG reduction targets, as well as any demonstrated short-term investment plans, policies and programs.

Expected Emissions Projections Chart
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Comprehensive Measure of Low Carbon Transition Alignment

Analyze low carbon transition exposure and management preparedness across a business’ value chain for each scope of emissions. Our assessment delivers more than just an Implied Temperature Rise rating, going beyond by looking at a company’s ambitions and targets. Investors can identify areas where each issuer is performing well and opportunities for improvement. 

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Analyze Expected Issuer Emissions Against Various Net-Zero Climate Scenario

 Our Low Carbon Transition Ratings are driven by a bottom-up scenario analysis, evaluating companies’ emission trajectories against expected regional policy and technology pathways required to meet the Paris Agreement and net-zero ambitions by the year 2050. This currently includes the UN PRI 1.5°C Policy Scenario* and IEA Net Zero 2050 Scenario. The IPR Forecast Policy Scenario (FPS) is coming soon.  

*The 1.5°C Required Policy Scenario (RPS) is from the UN PRI commissioned Inevitable Policy Response (IPR).

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Support Investor TCFD Reporting and Assess Issuer Disclosure

Paired with our Physical Climate Risk Metrics and Carbon Emissions Data solutions, our Low Carbon Transition Ratings enable investors to meet most TCFD recommendations. Additionally, investors receive a detailed assessment of issuer TCFD disclosure with respect to their quality of management across each thematic area of the TCFD. 

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Access our Transparent Methodology and Granular Data

Our Low Carbon Transition Ratings are underpinned by a transparent methodology, multiple levels of data and clear indicator guidance, which allows for validation and customization of the weighted data points to generate unique insights that align to investors’ objectives.  

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Holistic Integration of Management Preparedness

With more than 85 general and subindustry-specific management indicators – weighted by a company’s distribution of GHG emissions across Scopes 1, 2, 3 upstream and Scope 3 downstream, across the full business value chain – investors can integrate granular climate insights into their company assessments and valuation models.

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Ratings Expressed as Implied Temperature Rise

The top-level ratings are expressed as a simple contextualized signal, estimating the Implied Temperature Rise of issuers’ current low carbon transition performance. This expresses what global temperatures could rise to if the whole economy had the same percentage of misaligned emissions between now and the year 2050. This output enables investors to seamlessly categorize and compare different levels of performance across issuers.

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Dedicated Module to Assess Issuer Disclosure with TCFD

TCFD module is included in the rating to assess and track the comprehensiveness of issuer disclosure and translate our assessment of issuers’ managerial preparedness across the four thematic areas recommended by the TCFD: governance, strategy, risk management, and metrics and targets.

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Integrated Asset Impact Data

More accurately assess how companies are managing their net-zero transition. Estimate the impact of current CapEx on future investment alignment among the 9 highest emitting sectors including utilities, construction materials, and transportation. 

 

Material ESG issues

8,000+ Companies Covered

Sustainalytics' Low Carbon Transition Ratings span more than 8,000 companies and encompass most major global indices. Future expansion of the company database will align with the coverage of our ESG Risk Ratings.

Accessibility

Flexible Accessibility

The Low Carbon Transition Ratings are available through Global Access with screening and reporting tools, data-feeds, and application programming interface (API). They will be made available for several third-party distribution platforms in the future.

Accessibility

Analysis of Issuer's Transition Value at Risk

Value at Risk (VaR) is a financial metric that demonstrates the expected future impact to a company's bottom line due to the transition to a low carbon economy.  VaR is measured based on the policy costs of expected emissions and the impact of reduced market demand, where applicable. It is a cumulative value based on a discounted cash flow model for the years from now until 2050 that allows users to complete regulatory reporting, stress testing, scenario analysis, and portfolio optimization. 

Learn more about our Low Carbon Transition Ratings

To learn more about our Low Carbon Transition Ratings, view the video message from our Senior Vice President of Climate Solutions, Azadeh Sabour.

About Our Framework

We start with a baseline projection, which is based on corporate reporting and estimation modelling across all 3 scopes of emissions, including both the upstream and downstream segments of scope 3.

Next, we consider how the quality of the company's policies and programs, strategy, governance, and financial position affect the baseline emissions.

This emissions projection is based on a company's baseline emissions in combination with their managed emissions.

This is the company's sector- and region-specific budget required to align to a net-zero emissions pathway by 2050.

The expected emissions gap reflects the emissions that are not managed and indicates the severity of misaligned emissions.

The Expected Emissions Gap reflects the emissions that are not managed and indicates the severity of misaligned emissions.

Decomposition chart
LCTR---Emissions-Projections-Chart-2

Expected Emissions Gap Calculation

 Cumulative Emissions to 2050 (CO2)
Expected Emissions765 Mt
Net-Zero Budget211 Mt
Expected Emissions Gap553 Mt (+261%)
Implied Temperature Rise Score 2.4ºC
Implied Temperature Rise Category Significantly Misaligned

Use Cases 

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Climate Research Integration

  • Measure alignment of companies against a 1.5°C scenario
  • Deepen insights into transition risk and opportunities for portfolio management
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Implement Net-Zero Strategies

  • Assess forward-looking carbon emissions of companies, portfolios, funds, and benchmarks with net-zero pathways.
  • Meet commitments of global alliances and member groups such as the Net Zero Asset Manager Initiative and the Institutional Investors Group on Climate Change (IIGCC).
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Screening and Benchmarking

  • Set decarbonization targets and monitor performance.
  • Screen investable universe based on company exposure to, and/or management of, transition risks.
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Reporting & Client Communication

  • Support TCFD-aligned regulatory reporting.
  • Report to clients on how portfolios are aligned with global climate goals.
  • Respond to client net-zero mandates.
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Engagement and Voting

  • Evaluate company management of transition risks and opportunities.
  • Obtain transparency on corporate’s disclosure sufficiency to current TCFD recommendations.
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Thematic Investing

  • Create climate-aware investment products.

Report Insights

A company’s top-level rating is expressed as an Implied Temperature Rise signifying the expected level of global warming if the global economy had the same proportion of emissions misaligned to the net-zero budget. The absolute emissions gap across each scope of the company’s business activity are summarized through time series graphs, with the underlying components of the assessment illustrated in decomposition charts.

ESG Risk ratings report showcasing company rating

The degree of overall alignment to the net-zero budget is summarized for each scope of emissions across an issuer’s value-chain, providing transparency into how much each scope of emissions is contributing to the overall rating. A separate value-chain analysis for each of the exposure and management components is also provided.

ESG Risk ratings report showcasing value chain analysis

The issuer’s rating is analyzed in context of their peers in global public equity and bond markets, as well as industry and sub-industry specific peers. The issuer’s top peers by market capitalization are summarized with a view of their overall rating, Exposure and Management scores.

ESG Risk ratings report showcasing Peer Analysis

An overall management score out of 100 is provided, as well as an analysis identifying where action may be needed across the issuer's business activities. This is communicated through a breakdown of their management scores and contribution of key management indicators for each scope of emissions across the issuer’s value chain.

ESG Risk ratings report showcasing Management Score and Analysis​

An overall score of the comprehensiveness of issuers’ climate related disclosures, and a detailed analysis across the key TCFD thematic areas of governance, strategy, risk management and metrics & targets provides transparency into quality of their management.

ESG Risk ratings report showcasing Assessment of Issuer TCFD Reporting

Low Carbon Transition Value at Risk (VaR) informs investors about potential future losses their portfolio companies may face due to their exposure and management of the transition to a low carbon economy. By taking into account the policy costs of expected emissions, and the impact of reduced market demand for fossil fuels, VaR enables investors to respond to regulatory requirements, perform stress testing, and optimize their portfolio for transition scenarios.

ESG Risk ratings report showcasing Assessment of Issuer TCFD Reporting
Low Carbon Transition Rating report showcasing company rating

Why Sustainalytics?

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A Single Market Standard

Consistent approach to ESG assessments across the investment spectrum.

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Award-Winning Research and Data

Firm recognized as Best ESG Research and Data Provider by Environmental Finance and Investment Week.

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End-to-End ESG Solutions

ESG products and services that serve the entire investment value chain.

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30 Years of ESG Expertise

800+ ESG research analysts across our global offices.

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A Leading SPO Provider

As recognized by Environmental Finance and the Climate Bonds Initiative.

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