Sustainable Moat Investing: Considering Controversy
July 15, 2022
Read Time 3 MIN
Morningstar US Sustainability Moat Focus Index Methodology
Source: Morningstar and VanEck. As of 9/30/2021.
Sustainalytics Controversy Score
Sustainalytics assesses companies’ involvement in incidents with negative environmental, social, and governance (ESG) implications. Controversy involvement can be a key measure of the ESG performance of a company and may help inform investment decisions.
The Controversy Score seeks to identify incidents and events that may have a negative impact on a company’s reputation. It examines the financial risk to a company resulting from incidents and how a company has responded to the incidents to determine the severity of the controversy.
Incidents and Events
Sustainalytics monitors incidents which are a key building block of their Controversy Score. Incidents are company activities that have negative ESG impacts on stakeholders. They are assessed based on the negative impact as well as the reputational risk that the incident poses to the company. Incidents are tracked through media and non-government organizations.
Events are a series of isolated or related incidents that pertain to the same ESG issue. Sustainalytics has 40 event indicators. For example, a series of employee strikes in various company locations forms an event under the “Labor Relations” event indicator.
To assess an event, an analyst looks at the series of underlying incidents from a holistic perspective and assesses them based on the following factors:
- Impact: Negative impact that the incidents have caused on the environment and society
- Risk: Business risk to the company as a result of the incidents
- Management: A company’s management systems and response to incidents
Events are assessed on a scale of five levels from low to severe. The Morningstar US Sustainability Moat Focus Index excludes those companies that have had a severe controversy score in the last three years.
Source: Morningstar. As of 6/30/2022.
Controversy Case Study: Bayer AG1
Bayer is currently assigned a severe controversy score based on the social impact of their products, specifically glyphosate-based products such as Roundup. When Bayer acquired Monsanto in 2018, it acquired all the risks associated with Monsanto’s business in the agriculture chemistry industry. In 2015, the Word Health Organization classified glyphosate as potentially carcinogenic. In August 2018, the first liability lawsuit related to the product went to trial and Monsanto was ordered to pay $289 million to the plaintiff. Since then, lawsuits increased exponentially to at least 125,000 filed and unfiled claims by June 2020.
Sustainalytics assesses this Bayer controversy as severe due to the mounting stakeholder scrutiny over glyphosate-based products, the increase in glyphosate-related litigation as well as the increased number of countries that are imposing restrictions, and partial bans, or full bans on glyphosate-based products. While the company has been able to settle the majority of the pending lawsuits in the U.S., there is still uncertainty around the future of the glyphosate litigation process and the trend of potential liability lawsuits in the future.
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.
Source of all information: Morningstar. Unless otherwise noted, all information is as of 6/30/2022.
1 Bayer AG is not eligible for the Morningstar US Sustainability Moat Focus Index as a non-U.S. company.
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 has 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.
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.
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.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
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