Desjardins RI Can Net-Zero Emissions's holdings are exposed to average levels of ESG risk relative to those of its peers in the Canadian Equity Large Cap 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 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.
Based on its latest prospectus, sustainability or ESG factors are a focus in the investment process of Desjardins RI Can Net-Zero Emissions. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. The fund aims to avoid or minimize holdings in companies breaching international norms, including the UN Global Compact or the Universal Declaration of Human Rights. The fund has little exposure (0.26%) to companies with high or severe controversies. From bribery and corruption to workplace discrimination and environmental incidents, controversies are incidents that have a negative impact on stakeholders or the environment, which create some degree of financial risk for the company. 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.
Currently, the fund has 31.1% involvement in fossil fuels, which is high in both absolute and relative terms. The average peer in the same Canadian Equity category has 25.7% 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. By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons and tobacco. Yet this goal is far from achieved, as the fund exhibits 2.27% exposure to tobacco. This compares with 2.02% for its average peer in the Canadian Equity Large Cap category.
Desjardins RI Can Net-Zero Emissions has a 12-month asset-weighted Carbon Risk Score of 12.7. This is situated at the lower end of the medium carbon risk band, suggesting that its portfolio holdings are not among the worst-positioned to transition to a low-carbon economy, but they are not among the best-positioned either. Investors concerned about the transition risks may prefer to consider funds with negligible or low carbon risk. Funds with a lower carbon risk classification may be more favored by investors concerned about transition risks, as such funds often tilt toward companies that operate in sectors less exposed to the transition (for example, healthcare and IT) or companies in more carbon-intensive sectors (for example, materials and utilities) that consider climate change in their business strategy, and therefore are positively aligned with the transition. The fund's 5.4% involvement in carbon solutions is roughly in line with the 5.4% average involvement of its peers in the Canadian Equity category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on.