The ESG risk of Direxion Hydrogen ETF's holdings is comparable to its peers in the Natural Resources Sector Equity 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.
Based on its latest prospectus, sustainability or ESG factors are a focus in the investment process of Direxion Hydrogen ETF. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. Currently, the fund has 24.5% involvement in fossil fuels, which compares favorably with 28.6% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas. Its 9.2% involvement in carbon solutions is higher than the 4.7% average involvement of its peers in the Natural Resources category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on.
One area to watch is the strategy’s carbon risk exposure. Although Direxion Hydrogen ETF's 12-month asset-weighted Carbon Risk Score of 22.5 is classed as medium, it is situated at the higher end of the medium carbon risk band, indicating that the fund's portfolio holdings would fare worse than its peers in the transition to a low-carbon economy. Investors concerned about the transition risks may prefer to consider funds with negligible or low carbon risk. These funds invest in companies that tend to operate in sectors less exposed to the transition (such as healthcare and IT) and/or companies in more carbon-intensive sectors (such as industrials and utilities) but that consider climate change in their business strategy and products, and therefore are positively aligned with the transition.
The fund exhibits moderate exposure (8.73%) to companies with high or 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.