DFA US Social Core Equity 2 Portfolio has an average Morningstar Sustainability Rating of 3 globes, indicating that the ESG risk of holdings in its portfolio is similar to that of its peers in the US Equity Large Cap Blend category. 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.
One key area of strength for DFA US Social Core Equity 2 Portfolio is its low Morningstar Portfolio Carbon Risk Score of 7.89 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 aims to avoid or minimize holdings in companies breaching international norms, including the UN Global Compact or the Universal Declaration of Human Rights.
One potential issue for a sustainability-focused investor is that DFA US Social Core Equity 2 Portfolio doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate are more likely to align with the expectations of an investor who cares about sustainability issues. By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, thermal coal, and and small arms. Yet this goal is far from achieved, as the fund exhibits 0.55% and 0.38% exposure to controversial weapons and small arms, respectively. This compares with 1.57% and 0.86% for its average peer in the US Equity Large Cap Blend category.
The fund exhibits moderate exposure (6.26%) 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.