Northern Small Cap Value Fund may not appeal to sustainability-conscious investors.
The ESG risk of Northern Small Cap Value Fund's holdings is comparable to its peers in the US Equity Small Cap category, thus earning an average Morningstar Sustainability Rating of 3 globes. Funds in the same category rated 4 or 5 globes 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.
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 exhibits negligible exposure (0.50%) to companies with high or severe controversies. 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.
One potential issue for a sustainability-focused investor is that Northern Small Cap Value 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. The fund's current involvement in fossil fuels reaches 9.10%, surpassing 8.72% for its average category peer. 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. However, the fund struggles to fulfill this goal, as it exhibits 0.63% exposure to such companies. This compares with 0.65% for its average peer in the US Equity Small Cap category.
Northern Small Cap Value Fund's asset-weighted Carbon Risk Score of 13.76 is at the lower end of the medium carbon risk band. This suggests the fund’s investee companies are adequately 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.