Energy Select Sector SPDR® Fund is likely to concern sustainability-focused investors given certain substandard ESG attributes.
This fund has above-average exposure to ESG risk relative to its peers in the Energy Sector Equity category, earning it the second-lowest Morningstar Sustainability Rating of 2 globes. Investors concerned about ESG risk may be better off with funds earning 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 Energy Select Sector SPDR® Fund doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate are more likely to align with the expectations of an investor who cares about sustainability issues. One area to watch is the fund's high carbon risk exposure, as indicated by its Carbon Risk Score of 40.34, suggesting that the portfolio is positioned to fare poorly in the transition to a low-carbon economy. This score represents the asset-weighted carbon risk score of the portfolio's equity or corporate bond holdings, averaged over the trailing 12 months. Companies with high risk classification will likely be disadvantaged in the transition to net zero, while those that are less exposed to climate risks and enable the transition by offering carbon solutions may fare better. Currently, the fund has 99.43% involvement in fossil fuels, which is high in both absolute and relative terms. The fossil fuel involvement of funds in the same Equity Energy category averages 88.50%. Companies are considered involved in fossil fuels if they derive at least 5% of their revenue from thermal coal, oil, and gas.
No companies held by Energy Select Sector SPDR® 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 can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, controversies can damage the reputation of both companies themselves and their shareholders.