This fund has above-average exposure to ESG risk relative to its peers in the Global Equity Large Cap 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.
The fund has relatively high exposure (9.01%) 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.
Based on its latest prospectus, sustainability or ESG factors are a focus in the investment process of FlexShares STOXX Glbl ESG Select Fund. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. FlexShares STOXX Glbl ESG Select Fund has an asset-weighted Carbon Risk Score of 7.8, 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 11.2% involvement in fossil fuels, which is roughly in line with 9.5% 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 12.2% involvement in carbon solutions is roughly in line with the 11.8% average involvement of its peers in the Global Large-stock Blend 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 controversial weapons and thermal coal. The fund mostly fulfills this goal; however, it does exhibit 0.14% exposure to companies involved in thermal coal. This compares with 0.63% for its average peer in the Global Equity Large Cap category.