GMO Emerging Markets ex-China Fund's holdings are exposed to average levels of ESG risk relative to those of its peers in the Global Emerging Markets Equity category, thus earning it an average Morningstar Sustainability Rating of 3 globes. Competing funds in the category with ratings of 4 or 5 globes have less ESG risk in their holdings. Unlike impact, which measures positive environmental and societal outcomes attributable to an investment, ESG risk reflects the degree to which investments could be affected by material ESG issues, including climate change, biodiversity, product safety, community relations, data privacy and security, bribery and corruption, and corporate governance.
One potential issue for a sustainability-focused investor is that GMO Emerging Markets ex-China Fund doesn’t have an ESG-focused mandate. A fund with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. Currently, the fund has 16.9% involvement in fossil fuels, surpassing 7.9% for the average peer in its category. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas.
GMO Emerging Markets ex-China Fund has a 12-month asset-weighted Carbon Risk Score of 13.0. This is situated at the lower end of the medium carbon risk band, suggesting that its portfolio holdings are not among the worst-positioned to transition to a low-carbon economy, but they are not among the best-positioned either. Investors concerned about the transition risks may prefer to consider funds with negligible or low carbon risk. Such 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. By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons and thermal coal. The fund mostly fulfills this goal; however, it does exhibit 0.58% exposure to companies involved in thermal coal. This compares with 0.85% for its average peer in the Global Emerging Markets Equity category. The fund has a modest level of exposure (3.75%) 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.
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