This fund has above-average exposure to ESG risk relative to its peers in the Energy Sector Equity category, earning it the second-lowest Morningstar Sustainability Rating of 2 globes. Funds with 4 or 5 globes tend to hold securities that are 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 iShares Global Energy ETF doesn’t have an ESG-focused mandate. A fund with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. One area to watch is the fund's high carbon risk exposure, as indicated by its Carbon Risk Score of 36.9, suggesting that the portfolio is positioned to fare poorly in the transition to a low-carbon economy. This score represents the asset-weighted carbon risk score of the portfolio holdings, averaged over the trailing 12 months. Companies with high risk classification will likely be disadvantaged in the transition to net zero, while those that are less exposed to climate risks and enable the transition by offering carbon solutions may fare better. Currently, the fund has 99.1% involvement in fossil fuels, which is high in both absolute and relative terms. The average peer in the same Equity Energy category has 87.0% exposure to fossil fuel-related businesses. 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 a modest level of exposure (7.87%) to companies with high or severe controversies. Companies with controversies are involved in incidents such as corruption, employee abuses, and that pose some degree of business risks to the company. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, they controversies can damage the reputation of both companies themselves and their shareholders.