Knights of Columbus Small Cap Fund may not appeal to sustainability-conscious investors.
This fund has above-average exposure to ESG risk relative to its peers in the US Equity Small Cap 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 Knights of Columbus Small Cap 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. Currently, the fund has 7.08% involvement in fossil fuels, which is higher than 6.75% 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.
By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, and, as expected, the fund is not currently invested in such companies. The fund aims to avoid, or limit exposure to, companies in violation with international norms, such as the UN Global Compact or the Universal Declaration of Human Rights. The fund has little exposure (0.47%) to companies with high or severe controversies. From bribery and corruption to workplace discrimination and environmental incidents, controversies are incidents that may negatively affect stakeholders, the environment, or the company’s operations.
Knights of Columbus Small Cap Fund has an asset-weighted Carbon Risk Score of 11.99. This is situated at the lower end of the medium carbon risk band, suggesting that its current equity and/or bond holdings are moderately positioned to transition to a low-carbon economy. Investors concerned about the transition risks may prefer to consider funds with negligible or low carbon risk. Funds with a lower carbon risk classification may be more favored by investors concerned about transition risks, as such funds often tilt toward companies that operate in sectors less exposed to the transition (for example, healthcare and IT) or companies in more carbon-intensive sectors (for example, materials and utilities) that consider climate change in their business strategy, and therefore are positively aligned with the transition.