This fund has a Morningstar Sustainability Rating of 5 globes, indicating that the ESG risk of holdings in its portfolio is rather low relative to those of its peers in the Morningstar Aggressive Allocation 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.
First Foundation Total Return Fund has an asset-weighted Carbon Risk Score of 8.8, 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.
One potential issue for a sustainability-focused investor is that First Foundation Total Return 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. Currently, the fund has 40.9% involvement in fossil fuels, which is high in both absolute and relative terms. The average peer in the same Moderately Aggressive Allocation category has 10.7% 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.
The fund has a modest level of exposure (2.39%) to companies with high or severe controversies. Companies with controversies are involved in incidents such as corruption, employee abuses, and that pose some degree of business risks to the company. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, they controversies can damage the reputation of both companies themselves and their shareholders.