Clean energy funds 10x more carbon intensive than global equity market, finds research

Analysis from Morningstar finds sustainable portfolios have “hidden ESG risks”

An average renewable energy portfolio is roughly 10 times more carbon-intensive than the broad global equity market, according to new research from Morningstar. 

In the analysis, Morningstar applied carbon data and corporate ESG ratings from its subsidiary, Sustainalytics, to its equity indices. As well as having a significantly higher carbon intensity, its Global Markets Renewable Energy Index was also riskier from an ESG perspective, it found. 

“Renewable energy-focused portfolios aren’t always as ESG-friendly and low-carbon as investors might expect,” said Dan Lefkovitz, Strategist, Morningstar Indexes, adding that  “many companies are involved in both fossil fuels and green solutions”.

Morningstar’s Global Markets Renewable Energy Index includes carbon-heavy companies such as China Power, RWE and AES. The research also highlighted that, while many companies in renewable energy indices do focus exclusively on climate solutions, they can still have carbon-intensive operations, such as Sunrun, Schweiter Technologies and Nankai Electric Railway. 

Electric car manufacturer Tesla, which owns renewables firm SolarCity, is a constituent in many of Morningstar’s renewable energy indices. However, the research pointed out, the company has exposure to a number of high-profile social and governance risks.  

The research also found that portfolios titled towards smaller or lower-price stocks may carry higher ESG risk than the broader market. Morningstar's US broad value index outperforms the market on ESG risk and carbon intensity, while its growth counterpart underperforms on both measures. Morningstar's small-cap index carries even higher ESG risk, but not enough of its constituents disclose emissions to calculate portfolio-level carbon intensity. 

Dividend-paying stocks tend to carry above-market ESG risks, too, according to the research. The Morningstar Dividend Yield Focus Index is heavy on energy stocks such as Exxon, Chevron, Duke Energy and Southern Co., which pay good dividends but contribute to both ESG risk and carbon intensity. 

“Many popular investment strategies carry higher ESG risk and carbon intensity than investors realise,” said Lefkovitz. “Renewable energy-focused portfolios are surprisingly carbon intensive as are low volatility strategies. Dividends, infrastructure and value investments tend to carry elevated ESG risk.”