The ESG risk of Financial Select Sector SPDR® Fund's holdings is comparable to its peers in the Financials 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 provides investors with a signal that reflects to what degree their investments are exposed to risks related to material ESG issues, such as climate change and inequalities, that are not sufficiently managed. ESG risk differs from impact, which is about seeking positive environmental and social outcomes.
Financial Select Sector SPDR® Fund has a Carbon Risk Score of 8.59, indicating portfolio companies face low carbon-related risks in the transition to a low-carbon economy. Currently, the fund has 0.29% involvement in fossil fuels, which compares favorably with 0.40% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas.
One potential issue for a sustainability-focused investor is that Financial Select Sector SPDR® Fund doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate are more likely to align with the expectations of an investor who cares about sustainability issues. The fund has significant exposure (12.18%) to companies with high or severe controversies. Companies with high or severe controversies may be involved in incidents such as corruption, employee abuses, environmental incidents, and corporate scandals that pose serious business risks to the company.