This fund has relatively low exposure to ESG risk compared with its peers in the Japan Equity category, earning it the second highest Morningstar Sustainability Rating of 4 globes. 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.
One key area of strength for Matthews Japan Fund is its low Morningstar Portfolio Carbon Risk Score of 7.05 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. By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, thermal coal, and and small arms. The fund fulfills this goal by having negligible investment exposure to each of these activities.
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. No companies held by Matthews Japan Fund are recognized as being involved in controversies at a high or severe level. 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.
One potential issue for a sustainability-focused investor is that Matthews Japan 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.