Scored 4 globes by Morningstar, rated A on sustainability by MSCI, and featured on Forbes as one of the best 2022 ESG Funds, VFTAX’s sustainable prospects look huge and feel unmissable to many investors. However, a closer examination suggests that the fund’s investments approach is weak relative to its scale and potential. Though titled “Social”, the fund lacks advocacy for sustainability, and controversies are always mounting over its top holdings like Amazon and Microsoft. Therefore, against its high ratings, I don’t find VFTAX to be a strong ESG fund. An overall score of 0.6 planets seems fair.
Morningstar held VFTAX as low carbon (risk score: 4.27), low fossil fuel (0.75), and low environmental risk (2.75). In social and governance, the fund scored slightly worse (9.80 and 7.52 respectively), yet overall, its ESG ratings are good, excellent even. Nonetheless, a closer glimpse at its portfolio gives us mixed feelings.
VFTAX’s top holdings are notorious names such as Apple, Microsoft, Alphabet, Amazon, Tesla, and Meta, some of which call in my attention. Say, Meta and Amazon: both firms, in terms of ESG ratings, score relatively low to its industry. Meta is rated 709th out of 735 Software & Service companies, while Amazon is ranked the least sustainable company (441st out of 441) in Retailing.
Beyond ESG ratings, it’s noticeable that controversies spiral over these holdings as big industry players: antitrust accusations, unfair business practices, data privacy, transparency, issues with labor conditions, or wage inequality. Whether it’s “E”, “S”, or “G” in ESG, VFTAX’s top holdings’ performance are far from exemplary.
Having these firms as its top holdings, in my opinion, smears VFTAX’s sustainable positioning.
To filter its portfolio, VFTAX screens ESG criteria and excludes companies that fail to meet the thresholds or work in controversial product categories like fossil fuel, alcohol, weapons, etc. This approach is limited to exclusions of ‘bad’ rather than inclusions of ‘good’. It barely recognizes ESG high performers or uses its resources to positively influence corporate behavior on ESG-related issues. That results in VFTAX Portfolio composed primarily of Technology (35.30%) instead of key ESG industries like green energies. Furthermore, if we compare the portfolio of VFTAX with VOO - Vanguard’s largest US-based ETF with $560 billion assets under management – top holdings representations look nearly the same, with exception only to the obviously infamous J&J or Wells Fargo. This indicates either low commitments or greenwashing for worse.
As a leading fund, VFTAX has vast potential to influence positive change toward sustainability. But sadly, it seems to prefer a less initiative, less volatile, and thus less effective approach to deliver ESG values.
Vanguard Group Inc is a mutual fund giant with over US$7.2 trillion in assets under management. It’s the second largest financial group and holds enormous power to shape management decisions that can create positive sustainable impact and enforce accountability. However, the group is still quite passive in acting toward sustainability.
Vanguard has committed to slash its emissions by 2030 and achieve net zero emissions across all of its investment products by 2050. But according to the Institute for Energy and Financial Analysis, the group’s record to date shows inadequate stewardship and somehow implies that climate is not a priority. Over 2020, Vanguard still holds almost US$300bn of shares and bonds in fossil fuel exposed companies. It also has no formal coal exit policy yet, and 7% of its fund was still in tobacco, alcohol, gaming and defense stocks.
Representatives for the group defended their passive governance role insisting that they prefer to engage with companies rather than telling them what to do in achieving net zero. However, over 2020, the group reported engaging with only 5% companies it owns (655 out of ~13,000). Meanwhile, State Street, who holds less than half Vanguard’s assets under management, engaged with over 2,4008. And BlackRock, as Vanguard’s top competitor, engaged with over 3,000 (~24%).