The ESG risk of Global X Emerging Markets Bond ETF's holdings is comparable to its peers in the Emerging Markets Fixed Income category, thus earning an average Morningstar Sustainability Rating of 3 globes. Funds in the same category rated 4 or 5 globes tend to hold securities less exposed to ESG risk. 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.
One potential issue for a sustainability-focused investor is that Global X Emerging Markets Bond ETF doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. One area to watch is the fund’s carbon risk exposure. Its Carbon Risk Score of 28.60 is situated at the higher end of the medium carbon risk band, indicating the fund's investee companies are in a vulnerable position in the transition to a low-carbon economy. The score represented the asset-weighted Carbon Risk Score of the portfolio's equity or corporate bond holdings, averaged over the trailing 12 months.Funds with a lower carbon risk classification may be more favored by investors concerned about transition risks, as such funds often tilt toward companies that operate in sectors less exposed to the transition (for example, healthcare and IT) or companies in more carbon-intensive sectors (for example, materials and utilities) that consider climate change in their business strategy, and therefore are positively aligned with the transition. Currently, the fund has 48.2% involvement in fossil fuels, which is high in both absolute and relative terms. The fossil fuel involvement of funds in the same Emerging Markets Bond category averages 39.8%. Companies are considered involved in fossil fuels if they derive at least 5% of their revenue from thermal coal, oil, and gas. The fund has extremely high exposure (29.30%) to companies with high or severe controversies. From bribery and corruption to workplace discrimination and environmental incidents, controversies are incidents that have a negative impact on stakeholders or the environment, which create some degree of financial risk for the company. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, they can damage the reputation of both companies themselves and their shareholders.