The ESG risk of VanEck Emerging Markets Bond Fund's holdings is comparable to its peers in the Emerging Markets Fixed Income category, thus earning an average Morningstar Sustainability Rating of 3 globes. Funds in the same category rated 4 or 5 globes tend to hold securities less exposed to ESG risk. Unlike impact, which measures positive environmental and societal outcomes attributable to an investment, ESG risk reflects the degree to which investments could be affected by material ESG issues, including climate change, biodiversity, product safety, community relations, data privacy and security, bribery and corruption, and corporate governance.
One potential issue for a sustainability-focused investor is that VanEck Emerging Markets Bond Fund 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. One area to watch is the strategy’s carbon risk exposure. Although VanEck Emerging Markets Bond Fund's 12-month asset-weighted Carbon Risk Score of 29.5 is classed as medium, it is situated at the higher end of the medium carbon risk band, indicating that the fund's portfolio holdings would fare worse than its peers in the transition to a low-carbon economy. 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. Currently, the fund has 47.8% involvement in fossil fuels, which is high in both absolute and relative terms. The average peer in the same Emerging Markets Bond category has 39.8% 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. The fund exhibits extremely high exposure (20.62%) to companies with high or severe controversies. Companies with controversies are involved in incidents such as corruption, employee abuses, environmental incidents, and corporate scandals that pose serious business risks to the company. 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.