This fund has above-average exposure to ESG risk relative to its peers in the Natural Resources Sector Equity category, earning it the second-lowest Morningstar Sustainability Rating of 2 globes. 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 area to watch is the strategy’s carbon risk exposure. Although Victory Global Energy Transition Fund's 12-month asset-weighted Carbon Risk Score of 32.8 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. These funds invest in companies that tend to operate in sectors less exposed to the transition (such as healthcare and IT) and/or companies in more carbon-intensive sectors (such as industrials and utilities) but that consider climate change in their business strategy and products, and therefore are positively aligned with the transition. Currently, the fund has 73.5% involvement in fossil fuels, which is high in both absolute and relative terms. The fossil fuel involvement of funds in the same Natural Resources category averages 28.6%. Companies are considered involved in fossil fuels if they derive at least 5% of their revenue from thermal coal, oil, and gas.
Based on its latest prospectus, sustainability or ESG factors are a focus in the investment process of Victory Global Energy Transition Fund. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. By prospectus, the fund aims to avoid or minimize holdings in companies associated with thermal coal, and as expected, the fund does not currently invest in such companies. No companies held by Victory Global Energy Transition 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.