In the world of investing, it can be difficult to have your cake and eat it, too.
For investors seeking the combination of wide moat stocks and environmental, social, and governance (ESG) principles, the VanEck Morningstar ESG Moat ETF (CBOE:MOTE) answers the bell. MOTE, which debuted in late 2021, is the ESG counterpart to the famed VanEck Vectors Morningstar Wide Moat ETF (MOAT).
MOTE follows the Morningstar® US Sustainability Moat Focus Index, which leverages Morningstar’s storied wide moat research, combining it with ESG scoring.
“The Index focuses on three proprietary ESG criteria when selecting companies for inclusion: ESG Risk, Controversy, and Carbon Risk. Here we will explore the Sustainalytics ESG Risk Rating,” according to VanEck.
MOTE is relevant at a time when there’s more emphasis on ESG risk and how that risk can adversely affect investor outcomes.
“Material ESG Issues are focused on a topic, or set of related topics, that require a common set of management initiatives or a similar type of oversight. Human Capital issues, for example, revolve around the management of human resources. Business Ethics focuses on the management of general professional ethics from taxation and accounting to anti-competitive practices,” adds VanEck.
While this could change with time, the current ESG landscape confirms that some sectors are more likely to be ESG offenders than others. To that end, MOTE allocates just 4% of its total weight to the materials and energy sectors, and the fund features no utilities exposure.
Those are important traits because there’s a finite amount of things a company can do to bolster its ESG credentials and reduce related risks.
“Of a company’s total ESG risk, some portion simply cannot be addressed by management practices. For example, an oil and gas exploration and production company cannot eliminate the carbon emissions risks associated with its business practices. Those companies can manage other ESG risks such as employee safety and human rights issues, among others,” notes VanEck.
Conversely, some sectors are known for being bastions of favorable ESG scoring, and MOTE reflects as much. For example, the VanEck fund allocates 31.1% of its roster to technology stocks. While some ESG critics will quibble with these exposures, the fund devotes 27.1% of its combined weight to financial services and consumer staples names.
MOTE has another avenue for diminishing risk. None of its 57 holdings exceed weights of 3%, indicating that single-stock risk is relatively benign in the fund.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.