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Morningstar

Virtus Duff & Phelps Water P AWTPX Sustainability

Morningstar Medalist Rating
| Medalist Rating as of | See Virtus Investment Hub

Sustainability Analysis

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Sustainability Summary

 | Published as of .  Based on data as of

Virtus Duff& Phelps Water Fund has a number of positive attributes that a sustainability-focused investor may find appealing.

This strategy has an above-average Morningstar Sustainability Rating of 4 globes, indicating that the ESG risk of holdings in its portfolio is relatively low compared with those of its peers in the Equity Miscellaneous category. 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 Virtus Duff & Phelps Water Fund. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. One key area of strength for Virtus Duff & Phelps Water Fund is its low Morningstar Portfolio Carbon Risk Score of 8.67 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation. Thus, the companies held in the portfolio are in general alignment with the transition to a low-carbon economy.

The fund has no exposure to 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.

The fund's 5.1% involvement in carbon solutions is roughly in line with the 4.7% average involvement of its peers in the Natural Resources category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on.

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ESG Commitment Level Asset Manager

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Quickening the pace on ESG, but not yet ahead of the pack.

Allianz GI was an early signatory to the United Nations-backed Principles for Responsible Investment, but its broader ESG efforts have really taken off in the last three years. Matt Christensen, head of sustainable and impact investing, joined the firm in early 2021. Under his leadership, the central sustainability team has been through a major overhaul and expansion to strengthen central coordination of its ESG initiatives. As of May 2022, the team comprised 42 investment professionals with an average of 11 years of ESG experience. Team turnover has been elevated and requires monitoring, but it appears to have subsided since 2021.

Around 40% of the firm’s assets incorporate ESG considerations, with this growth aided by product launches and conversions. Half of that sits in what the firm defines as sustainability-focused strategies, some of which are light-touch approaches to sustainability. The share of assets reported as applying no ESG considerations is still sizable at 43%, owing to institutional mandates with no client-specified ESG approach and limitations to the quality and availability of ESG data for some asset classes.

ESG considerations have been integrated into the firm’s broader risk-control processes and investment professionals’ daily workflows; however, portfolio managers retain broad leeway to invest in ESG laggards outside of ESG-focused strategies.

Our research reveals that Allianz GI has a high level of focus on environmental and social issues in its proxy-voting policies. The firm often votes in favor of ESG-related shareholder proposals, though we note that support for climate proposals has declined as many of these were deemed too prescriptive by the firm’s active ownership team. The firm publishes key voting decisions and rationales on its website, and it has ramped up reporting on engagement activities, but it publicly discloses fund-level ESG metrics only for intentional funds.

The company has further formalized its engagement approach and launched a thematic engagement program featuring three core topics: climate, planetary boundaries, and inclusive capitalism. While the firm has a well-defined escalation process, it remains to be seen whether it will take decisive action on failed engagements. AllianzGI signed on to the Net Zero Asset Managers Initiative in March 2021. It has yet to provide more detail on specific targets and the decarbonization strategy for its third-party assets.