SPDR® Portfolio Developed Wld ex-US ETF SPDW Sustainability

SPDR® Portfolio Developed Wld ex-US ETF is likely to concern sustainability-focused investors given certain substandard ESG attributes.

This fund has the second-lowest Morningstar Sustainability Rating of 2 globes, indicating it holds securities with relatively high ESG risk compared to that of its peers in the Global Equity Large Cap category. Investors concerned about ESG risk may be better off with funds in the category that receive 4 or 5 globes as they tend to hold securities less exposed to ESG risk. 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 potential issue for a sustainability-focused investor is that SPDR® Portfolio Developed Wld ex-US ETF 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 11.80% involvement in fossil fuels, which is higher than 10.50% 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.

The fund has an asset-weighted Carbon Risk Score of 9.84, indicating that its current equity and/or bond holdings have low exposure to carbon-related risks. These are risks associated with the transition to a low-carbon economy such as increased regulation, changing consumer preferences, technological advancements, and stranded assets.

The fund has a modest level of exposure (6.83%) to companies with high or severe controversies. Companies with high or severe controversies are involved in incidents such as corruption, employee abuses, environmental incidents, and corporate scandals that pose serious business risks to the company.

SSGA’s support for key ESG shareholder resolutions increased to more than 70% in 2021, compared with roughly 50% support in 2020. Board diversity and climate risk disclosures rank among the major initiatives driving SSGA’s proxy-voting strategy across all portfolio companies. It also signed on to the Net Zero Asset Managers Initiative and has undertaken efforts to improve its own climate footprint and the diversity of its workforce.

The firm’s stewardship team uses its in-house R-factor tool to evaluate ESG risks unique to each portfolio company. This is a distinct and solid approach that helps the team prioritize certain engagements over others to make the most efficient use of its effort.

The stewardship team is integrated across multiple business units and continues to grow. It favors dialogue with companies to drive positive change, but it largely limits its effort to engagements and proxy voting. It does not take a more activist stance—such as initiating shareholder proposals — to push for change, which limits the strength of SSGA’s ESG agenda.

Most of the assets SSGA oversees track indexes that do not have an ESG focus, making it a permanent source of capital to many publicly traded companies that don’t have strong ESG profiles, such as those in the oil and gas industry. That means it often cannot take certain actions, such as divesting, when portfolio companies don't comply with its requests.

While most of the index-tracking strategies that SSGA offers do not have an ESG focus, it has started to offer more in the major markets that it serves, including the United States and Europe. Additionally, the firm has made efforts to integrate financially material ESG analysis across its actively managed strategies, but these represent about 15% of the firm's assets under management, so the impact likely won't be big compared with the AUM opportunity set that it oversees. Despite efforts to strengthen its ESG credentials, SSGA’s mix of assets adds some enduring challenges to its ESG program.