Inspire Corporate Bond ETF's holdings are exposed to average levels of ESG risk relative to those of its peers in the US Fixed Income category, thus earning it an average Morningstar Sustainability Rating of 3 globes. Competing funds in the category with ratings of 4 or 5 globes have less ESG risk in their holdings. Unlike impact, which measures positive environmental and societal outcomes attributable to an investment, ESG risk reflects 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.
Inspire Corporate Bond ETF holds itself out to be a sustainable or ESG-focused investment. In other words, ESG concerns are central to the investment process of this strategy. A fund with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. Its 12.1% involvement in carbon solutions is higher than the 6.8% average involvement of its peers in the Corporate Bond 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 tobacco, and, as expected, the fund is not currently invested in such companies. The fund aims to avoid, or limit exposure to, companies in violation with international norms, such as the UN Global Compact or the Universal Declaration of Human Rights.
The fund exhibits negligible exposure (1.65%) 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.
Currently, the fund has 25.5% involvement in fossil fuels, which is high in both absolute and relative terms. The fossil fuel involvement of funds in the same Corporate Bond category averages 12.2%. Companies are considered involved in fossil fuels if they derive at least 5% of their revenue from thermal coal, oil, and gas.
Inspire Corporate Bond ETF has a 12-month asset-weighted Carbon Risk Score of 12.6. This is situated at the lower end of the medium carbon risk band, suggesting that its portfolio holdings are not among the worst-positioned to transition to a low-carbon economy, but they are not among the best-positioned either. Investors concerned about the transition risks may prefer to consider funds with negligible or low carbon risk. 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.