Sustainable Moat Investing: Considering Carbon Risk

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Andrzej Rostek

Morningstar’s US Sustainability Moat Focus Index uses Sustainalytics’ ESG research to assess a company’s financial risks associated with the transition to a low-carbon economy.

Morningstar® US Sustainability Moat Focus IndexSM combines Morningstar’s recognized equity research process of identifying companies with long-lasting competitive advantages and attractive valuations with Sustainalytics’ industry-leading ESG research. The Index focuses on three proprietary ESG criteria when selecting companies for inclusion: ESG Risk, Controversy, and Carbon Risk. Here we will explore the Sustainalytics Carbon Risk Score.

Morningstar US Sustainability Moat Focus Index Methodology

Morningstar US Sustainability Moat Focus Index Methodology

Morningstar and VanEck. As of 9/30/2022.

How Sustainalytics Determines the Carbon Risk Score and Rating

Sustainalytics assesses a company’s financial risks associated with the transition to a low-carbon economy and assigns a Carbon Risk Rating. The Carbon Risk Rating is forward-looking in nature and is derived from an evaluation of a company’s material exposure to and management of carbon issues.

A company first receives a Carbon Exposure Score representing its sensitivity or vulnerability to carbon risks. The Carbon Exposure Score is broken down further by identifying the company’s total manageable risk. This includes carbon risks that can be influenced and managed through suitable policies, programs, and initiatives. The remaining risk is considered unmanageable risk. These unmanageable risks are those that are inherent to the products or services of a company and or the nature of a company’s business, which the company cannot manage. For example, an oil and gas exploration and production company will have carbon risks that simply cannot be managed away by sound policies and procedures.

The key to reducing a Carbon Risk Rating is to address manageable risks. As global carbon budgets continue to tighten, those companies that are not sufficiently managing their carbon risk may face increasing exposure to regulatory frameworks and the operational costs that come with them.

Carbon Risk Rating Components: Managed and Unmanaged Risks

Carbon Risk Rating Components: Managed and Unmanaged Risks

Morningstar. As of 9/30/2022.

Carbon Risk Rating Scale

Carbon Risk Rating Scale

Morningstar

Carbon Risk Ratings in Action

As of September 30, 2022, VanEck Morningstar ESG Moat ETF (MOTE) Carbon Risk numerical score was 5.06, which equates to low risk. VanEck Morningstar ESG Moat ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Morningstar US Sustainability Moat Focus Index. With its unique combination of forward-looking equity research and ESG screening, the Morningstar US Sustainability Moat Focus Index offers investors a U.S. equity strategy that seeks to provide attractive risk-adjusted returns while mitigating ESG risks.

Important Disclosures

Source of all information: Morningstar. Unless otherwise noted, all information is as of 9/30/2022.

Bayer AG is not eligible for the Morningstar US Sustainability Moat Focus Index as a non-U.S. company.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third-party sources are believed to be reliable and has not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

Fair value estimate: the Morningstar analyst’s estimate of what a stock is worth.

Price/Fair Value: ratio of a stock’s trading price to its fair value estimate.

The Morningstar® US Sustainability Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar ESG Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® US Sustainability Moat Focus IndexSM is a service mark of Morningstar, Inc.

The Morningstar US Sustainability Moat Focus Index consists of U.S. companies screened for ESG risks and identified as having long-term competitive advantages and whose stocks are the most attractively priced, according to Morningstar.

VanEck Morningstar ESG Moat ETF’s ESG strategy could cause it to perform differently compared to funds that do not have an ESG focus. The Fund’s ESG strategy may result in the Fund investing in securities or industry sectors that underperform other securities or underperform the market as a whole. The companies included in the US Sustainability Moat Focus Index may differ from companies included in other indices that use similar ESG screens. The Fund is also subject to the risk that the companies identified by the Index provider do not operate as expected when addressing ESG issues. Additionally, the Index provider’s proprietary valuation model may not perform as intended, which may adversely affect an investment in the Fund. Regulatory changes or interpretations regarding the definitions and/or use of ESG criteria could have a material adverse effect on the Fund’s ability to invest in accordance with its ESG strategy.

An investment in the VanEck Morningstar ESG Moat ETF may be subject to risks which include, among others, ESG investing strategy risks, investing in equity securities, consumer discretionary, financials, industrials and information technology sectors, medium-capitalization companies, market, operational, high portfolio turnover, index tracking, authorized participant concentration, new fund, absence of prior active market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.

Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing Considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.



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