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Sustainable Moat Investing: Considering Carbon Risk

19 October 2022

 

Morningstar® US Sustainability Moat Focus IndexSM combines Morningstar’s recognized equity research process of identifying companies with long-lasting competitive advantages and attractive valuations with Sustainalytics’ industry-leading ESG research. The Index focuses on three proprietary ESG criteria when selecting companies for inclusion: ESG Risk, Controversy, and Carbon Risk. Here we will explore the Sustainalytics Carbon Risk Score.

Morningstar US Sustainability Moat Focus Index Methodology

Morningstar US Sustainability Moat Focus Index Methodology

  • ESG RISK: Companies must have an ESG Risk Rating categorized as medium, low or negligible.
  • Controversy: A company´s controversy score must be 4 (out of 5) or lower throughout the trailing three years.
  • Carbon Risk: A company´s carbon risk score cannot be high or severe.
  • Product Involvement: A company must not be involved in tobacco, controversial weapons, civilian firearms, thermal coal.
  • Wide Moats: Only those companies that Morningstar equity research analyst have assigned a wide economic moat rating are eligible for inclusion.
  • Attractive Valuations: Select the most attractively priced wide moat companies based on a companies current price relative to its Morningstar analyst-assigned fair value estimate.

Source: Morningstar and VanEck. As of 30/9/2022.

Sustainalytics Carbon Risk Rating

Sustainalytics assesses a company’s financial risks associated with the transition to a low carbon economy and assigns a Carbon Risk Rating. The Carbon Risk Rating is forward-looking in nature and is derived from an evaluation of a company’s material exposure to and management of carbon issues.

A company first receives a Carbon Exposure Score which represents its sensitivity or vulnerability to carbon risks. The Carbon Exposure Score is broken down further by identifying the company’s total manageable risk. This includes carbon risks that can be influenced and managed through suitable policies, programs and initiatives. The remaining risk is considered unmanageable risk. These unmanageable risks are those that are inherent to the products or services of a company and/or the nature of a company’s business, which cannot be managed by the company. For example, an oil and gas exploration and production company will have carbon risks that simply cannot be managed away by sound policies and procedures.

The key to reducing a Carbon Risk Rating is to address manageable risks. As global carbon budgets continue to tighten, those companies that are not sufficiently managing their carbon risk may find themselves facing increasing exposure to regulatory frameworks and the operational costs than come with.

Carbon Risk Rating

Carbon Risk Rating

Source: Morningstar. As of 30/9/2022.

Carbon Risk Rating Scale

Carbon Risk Rating Scale

Carbon Risk Ratings in Action

VanEck Morningstar US Sustainable Wide Moat UCITS ETF seeks to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar US Sustainability Moat Focus Index.

Investing in the ETF is subject to risks, such as: Equity Market Risk, Limited Diversification Risk, Foreign Currency Risk.

Source of all information: Morningstar. Unless otherwise noted, all information is as of 30/09/2022.

Important Disclosure

This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.

This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).

The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.

VanEck Asset Management B.V., the management company of VanEck Morningstar US Sustainable Wide Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets. Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:
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Morningstar® US Sustainability Moat Focus Index is a trade mark of Morningstar Inc. and has been licensed for use for certain purposes by VanEck. VanEck Morningstar US Sustainable Wide Moat UCITS ETF is not sponsored, endorsed, sold or promoted by Morningstar and Morningstar makes no representation regarding the advisability in VanEck Morningstar US Sustainable Wide Moat UCITS ETF.
Effective December 17, 2021 the Morningstar® Wide Moat Focus IndexTM has been replaced with the Morningstar® US Sustainability Moat Focus Index.
Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover and longer holding periods for index constituents than under the rules in effect prior to this date.
It is not possible to invest directly in an index.

All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

© VanEck (Europe) GmbH / VanEck Asset Management B.V.

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