This strategy holds securities with low exposure to ESG risk relative to those of its peers in the Morningstar Greater China Equity category, earning it the highest Morningstar Sustainability Rating of 5 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.
Franklin FTSE Hong Kong ETF has an asset-weighted Carbon Risk Score of 9.0, 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. The fund has little exposure (0.24%) 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.
One potential issue for a sustainability-focused investor is that Franklin FTSE Hong Kong ETF 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 10.7% involvement in fossil fuels, surpassing 4.2% 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.