This fund has relatively low exposure to ESG risk compared with its peers in the Global Emerging Markets Equity category, earning it the second highest Morningstar Sustainability Rating of 4 globes. ESG risk measures the degree to which material environmental, social, and governance issues, such as climate change, biodiversity, human capital, as well as bribery and corruption, could affect valuations. ESG risk differs from impact, which is about driving positive environmental and social outcomes for society’s benefit.
Based on its latest prospectus, sustainability or ESG factors are a focus in the investment process of Avantis Responsible Emerging Mkts Eq ETF. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. One key area of strength for Avantis Responsible Emerging Mkts Eq ETF is its low Morningstar Portfolio Carbon Risk Score of 9.01 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation. Thus, the companies held in the portfolio are in general alignment with the transition to a low-carbon economy.
The fund's 9.7% involvement in carbon solutions is roughly in line with the 9.5% average involvement of its peers in the Diversified Emerging Mkts category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on. By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, thermal coal, and and small arms. The fund mostly fulfills this goal; however, it does exhibit 0.57%, 0.2%, and 0.45% exposure to companies involved in tobacco, thermal coal, and small arms, respectively. This compares with 0.67%, 0.81%, and 0.19% for its average peer in the Global Emerging Markets Equity category. The fund has a modest level of exposure (4.91%) to companies with high or severe controversies. Companies with controversies are involved in incidents such as corruption, employee abuses, and that pose some degree of business risks to the company. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, they controversies can damage the reputation of both companies themselves and their shareholders.