Moat Companies for a Sustainable FutureBrandon Rakszawski, Senior ETF Product ManagerOctober 29, 2021
Investors have increasingly been turning to sustainable investments. Mutual fund and ETF strategies focusing on climate issues, social causes or built with broad ESG considerations have grown rapidly in recent years. Those identified as a sustainable fund by Morningstar have seen assets increase by nearly 175% over the last three years. In that same time, the number of U.S. ETFs identified as sustainable have more than double from 91 ETFs three years ago to 174 as of September.1
Though investment options are expected to continue to expand, we are likely in the early stages of how to incorporate sustainable investment considerations into portfolio construction as investor views of ESG issues and company behaviors will undoubtedly evolve.
Morningstar has taken the long view by creating the Morningstar® US Sustainability Moat Focus IndexSM (the “Index”) that combines its proven equity research process with Sustainalytics’ forward-looking ESG research.
Sustainalytics: Forward-Looking ESG Perspective
Sustainalytics has built its reputation over the last 25 years as a market-leading ESG research provider. Its risk analysis assigns ratings to over 20,000 securities globally. Sustainalytics has long served the largest asset managers in the industry and has built a reputation as a leading provider of ESG data.
The Morningstar US Sustainability Moat Focus Index leverage several ESG ratings from Sustainalytics.
The Sustainalytics ESG Risk Rating is their broad-based, flagship ESG risk assessment. It is forward-looking in nature and identifies a company’s financial exposure to material ESG risks that are specific to its industry and that company itself.Sustainalytics then determines how successfully a company has managed those ESG risks. The remaining unmanaged ESG risks form the basis for its ESG Risk Rating, which spans from Negligible to Severe.
The Index will only consider those companies with a Negligible to Medium ESG Risk Rating.
Morningstar’s Controversy Score seeks to identify incidents and events that may have a negative impact on a company’s reputation. It is backward-looking in nature and seeks to identify the impact of an incident or series of incidents on the environment and/or society. It examines the financial risk to a company resulting from the incidents and how a company has responded to the incident to determine the severity of the controversy.
Companies with a Severe Controversy Score in the last three years are not included in the Index.
The Sustainalytics Carbon Risk Rating isolates a company’s financial risk associated with the transition to a low-carbon economy. This forward-looking assessment considers financial risk along a company’s value chain, from supply chain to operations to the products and services it offers. The Carbon Risk Score does not simply measure a company’s emissions; rather it reflects the level of unmanaged carbon risks affecting a company.
Only those companies with Negligible to Medium Carbon Risk Ratings are eligible for the Index.
In addition to Sustainalytics ratings, the Index considers whether a company is involved in certain controversial products.
• Tobacco: a company must not have more than 50% tobacco products involvement by revenue.
• Controversial Weapons: a company must not have any involvement in the production of controversial weapons (as defined by third-party Sustainalytics Global Compact Compliance Service exclusionary lists).
• Civilian Firearms: a company must not have any involvement in the manufacturing of firearms sold to civilian customers.
• Thermal Coal: a company must not have any involvement in Thermal Coal (extraction or power generation).
Morningstar’s Proven Moat Investing Philosophy
The Index pairs Sustainalytics ESG risk analysis with Morningstar’s equity research that identifies companies with long-term competitive advantages, or moats, that are trading at attractive valuations. Its methodology mirrors many of the attributes that have contributed to the long-term success of the Morningstar® Wide Moat Focus IndexSM, which serves as the benchmark index of the VanEck Morningstar Wide Moat ETF (MOAT).
The Index leverages Morningstar’s 100-person equity research team, which implements a single research philosophy across 1,500 companies globally. Each analysis assigns a forward-looking economic moat rating and fair value estimate to each company they cover based on the firm’s consistent research framework.
A Sustainable Approach to Moat Investing
Many of the most popular sustainable investment strategies seek to offer broad exposure to market indexes while applying some level of exclusionary or inclusionary ESG screens. This may reduce ESG risk in a portfolio, but does not address other performance drivers. The Morningstar US Sustainability Moat Focus Index’s unique combination of forward-looking equity research and ESG screening offers investors a U.S. equity strategy that seeks to provide investors with attractive risk-adjusted returns while mitigating ESG risks.
VanEck Morningstar ESG Moat ETF (MOTE) seeks to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar US Sustainability Moat Focus Index.
For further reading:
1 Source: Morningstar as of 9/30/2021.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Fair value estimate: the Morningstar analyst's estimate of what a stock is worth.
Price/Fair Value: ratio of a stock's trading price to its fair value estimate.
The Morningstar® US Sustainability Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar ESG Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® US Sustainability Moat Focus IndexSM is a service mark of Morningstar, Inc.
The Morningstar US Sustainability Moat Focus Index consists of U.S. companies screened for ESG risks and identified as having long-term competitive advantages and whose stocks are the most attractively priced, according to Morningstar.
The Morningstar® Wide Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM is a service mark of Morningstar, Inc.
The Morningstar® Wide Moat Focus IndexSM consists of U.S. companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover and longer holding periods for index constituents than under the rules in effect prior to this date.
VanEck Morningstar ESG Moat ETF’s ESG strategy could cause it to perform differently compared to funds that do not have an ESG focus. The Fund’s ESG strategy may result in the Fund investing in securities or industry sectors that underperform other securities or underperform the market as a whole. The companies included in the US Sustainability Moat Focus Index may differ from companies included in other indices that use similar ESG screens. The Fund is also subject to the risk that the companies identified by the Index provider do not operate as expected when addressing ESG issues. Additionally, the Index provider’s proprietary valuation model may not perform as intended, which may adversely affect an investment in the Fund. Regulatory changes or interpretations regarding the definitions and/or use of ESG criteria could have a material adverse effect on the Fund’s ability to invest in accordance with its ESG strategy.
An investment in the VanEck Morningstar ESG Moat ETF may be subject to risks which include, among others, ESG investing strategy risks, investing in equity securities, consumer discretionary, financials, industrials and information technology sectors, medium-capitalization companies, market, operational, high portfolio turnover, index tracking, authorized participant concentration, new fund, absence of prior active market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.
ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.
Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies.
An investment in the VanEck Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, investing in equity securities, consumer discretionary, consumer staples, financials, health care, industrials and information technology sectors, medium-capitalization companies, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider a Fund's investment objective, risks, charges and expenses carefully before investing. To obtain a prospectus and summary prospectus for VanEck Funds and VanEck ETFs, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus for VanEck Funds and VanEck ETFs carefully before investing.
Authored byBrandon Rakszawski
Senior ETF Product Manager
The Difference is Morningstar
Morningstar Wide Moat ETF
Index: Morningstar® Wide Moat Focus IndexSM (MWMFTR) Focus: Domestic
Wide Moat Fund
Index: Morningstar® Wide Moat Focus IndexSM (MWMFTR) Focus: Domestic
Morningstar International Moat ETF
Index: Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) Focus: International
Global Wide Moat ETF
Index: Morningstar® Global Wide Moat Focus IndexSM (MSGWMFNU) Focus: Global