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MFS Mid Cap Growth I OTCIX Sustainability

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Sustainability Analysis

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Sustainable Summary

MFS Mid Cap Growth Fund has a number of positive attributes that a sustainability-focused investor may find appealing.

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 US Equity Mid Cap category. ESG risk measures the degree to which material environmental, social, and governance issues, such as climate change and inequalities, 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 MFS Mid Cap Growth Fund is its low Morningstar Portfolio Carbon Risk Score of 5.11 and low fossil fuel exposure of 1.19% 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 exhibits negligible exposure (1.45%) to companies with high or severe controversies. From bribery and corruption to workplace discrimination and environmental incidents, controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, controversies can damage the reputation of both companies themselves and their shareholders.

One potential issue for a sustainability-focused investor is that MFS Mid Cap Growth 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.

ESG Commitment Level Asset Manager

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MFS’ generally long investment horizon is a natural ally to its ESG incorporation efforts. The firm’s talented central research team, which includes more than 100 fundamental research analysts, integrates ESG data into its broader analyses of companies. ESG is not considered in a top-down fashion, and the portfolio managers do not screen out or otherwise exclude any stock purely on the merits of an ESG ranking or score. Rather, the research analysts adjust model inputs based on the materiality of any ESG risks that a company may be facing. These assumptions impact analysts’ buy and sell recommendations, which flow into portfolio decisions. This long-term-focused, bottom-up effort tends to push its funds away from poor-ESG stocks and into companies with more-sustainable business models. MFS does not offer ESG-mandated products, though its current lineup generally scores well against its category peers in terms of Portfolio Sustainability Scores.

The firm also has dedicated central ESG resources, though they are not deeply experienced in the space. Barnaby Weiner, MFS’ first ever chief sustainability officer, took over the role in 2018 after spending years as a traditional portfolio manager. He is joined by three dedicated ESG research specialists, each of whom began their careers as fundamental analysts, but two of whom began their ESG roles within the past three years. The central team plays more of a support role and pushes out data and research to the fundamental analysts.

MFS still has plenty of room to grow. Its portfolio managers are not as actively engaged with company management on ESG issues as some peers. Proxy voting is largely done by a central team, and its formal voting guidelines are not as robust as other firms’. Additionally, MFS generally lags higher-ranked peers in terms of disclosures around fund- and company-level ESG metrics.