This fund has above-average exposure to ESG risk relative to its peers in the US Equity Large Cap Blend 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 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.
The fund exhibits relatively high exposure (9.74%) to companies with high or severe controversies. Companies with controversies may be involved in incidents such as corruption, employee abuses, and environmental incidents that have a negative impact on stakeholders or the environment. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, they can damage the reputation of both companies themselves and their shareholders.
Based on its latest prospectus, sustainability or ESG factors are a focus in the investment process of FlexShares STOXX US ESG Select Fund. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. FlexShares STOXX US ESG Select Fund 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. By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons and thermal coal. The fund fulfills this goal by having negligible investment exposure to each of these activities.
Currently, the fund has 8.6% involvement in fossil fuels, which is roughly in line with 8.5% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas. The fund's 13.1% 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.