This strategy has an above-average Morningstar Sustainability Rating of 4 globes, indicating that the ESG risk of holdings in its portfolio is relatively low compared with those of its peers in the Natural Resources Sector Equity category. 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.
Based on its latest prospectus, sustainability or ESG factors are a focus in the investment process of First Trust Water ETF. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. Currently, the fund has 4.3% involvement in fossil fuels, which compares favorably with 29.1% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas. Its 11.4% involvement in carbon solutions is higher than the 4.7% average involvement of its peers in the Natural Resources category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on. No companies held by First Trust Water ETF 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.
First Trust Water ETF has a 12-month asset-weighted Carbon Risk Score of 10.6. 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.