Clearbridge Focus Value ESG ETF's holdings are exposed to average levels of ESG risk relative to those of its peers in the US Equity Large Cap Blend 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. ESG risk provides investors with a signal that reflects to what degree their investments are exposed to risks related to material ESG issues, including climate change, biodiversity, product safety, community relations, data privacy and security, bribery and corruption, and corporate governance, that are not sufficiently managed. ESG risk differs from impact, which is about seeking positive environmental and social outcomes.
Based on its latest prospectus, sustainability or ESG factors are a focus in the investment process of Clearbridge Focus Value ESG ETF. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. Clearbridge Focus Value ESG ETF has an asset-weighted Carbon Risk Score of 7.4, 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.
Currently, the fund has 11.0% involvement in fossil fuels, surpassing 8.5% 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. By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, and and thermal coal. Yet this goal is far from achieved, as the fund exhibits 1.41% exposure to thermal coal. This compares with 0.93% for its average peer in the US Equity Large Cap Blend category.
The fund's 12.8% involvement in carbon solutions is roughly in line with the 13.1% average involvement of its peers in the Large Blend category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on. The fund has a modest level of exposure (7.06%) 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.