This fund lands in the 10% of strategies with the highest ESG risk in the US Equity Large Cap Blend category, earning it the lowest Morningstar Sustainability Rating of 1 globe. Funds with 4 or 5 globes tend to hold securities that are less exposed to ESG risk. Unlike impact, which focuses on generating positive environmental and societal outcomes, ESG risk measures the degree to which investments could be affected by material ESG issues, including climate change, biodiversity, product safety, community relations, data privacy and security, bribery and corruption, and corporate governance.
One potential issue for a sustainability-focused investor is that WisdomTree US Earnings 500 Fund doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. Currently, the fund has 12.8% involvement in fossil fuels, surpassing 9.0% for the average peer in its category. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas. By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, and and thermal coal. Yet this goal is far from achieved, as the fund exhibits 1.5%, 0.85%, and 1.08% exposure to controversial weapons, tobacco, and thermal coal, respectively. This compares with 1.55%, 0.41%, and 0.97% for its average peer in the US Equity Large Cap Blend category. The fund exhibits high exposure (14.43%) to companies with severe controversies. Controversies are incidents that have a negative impact on stakeholders or the environment, which create some degree of financial risk for the company. Examples of types of controversies include bribery and corruption scandals, workplace discrimination and environmental incidents. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. Such controversies can also damage the reputation of both companies themselves and their shareholders.
WisdomTree US Earnings 500 Fund has an asset-weighted Carbon Risk Score of 9.2, indicating that its companies have low exposure to carbon-related risks. These are risks associated with the transition to a low-carbon economy such as increased regulation, changing consumer preferences, technological advancements, and stranded assets.