The Vanguard Global Sustainable Equity Fund aims to deliver first and foremost long term growth to its investors, although it also includes sustainable considerations in its ‘manifesto’. However, particularly for a fund with such an absolute name, this fund in particular presents many issues. There is a lack of transparency around the selection process, and the benchmark that Vanguard gives themselves for finding sustainable investments sets a very low bar indeed. The brightest point in the following analysis is surrounding the sustainability of Vanguard, and Wellington Management, who help manage the fund. They both have elements of their corporate practices that are highly commendable, although each have their own shortcomings - lack of environmental track record and lack of transparency with personnel. Overall, this fund does not really live up to its billing, and I feel sufficiently restrained by this to only give it a score of 0.7 planets.
Top 10 holdings are below - Name, percentage, ESG :
1) Microsoft, 5.34%, 13.8, 2) DBS Group Holdings, 3.84, 20.2, 3) Merck and Co, 3.71%, 21.9, 4) B3 SA - Brazil Bolsa Balcao, 3.62%, 15.2, 5) Compass Group, 3.48%, 17.9, 6) Cie Generale des Etablissements Michelin, 3.36%, 12.5, 7) Visa Inc, 3.35%, 16.1, 8) ING Groep, 3.26%, 22.6, 9) Mitsubishi UFJ, 3.09, 18.4, 10) Cisco Systems, 3.05%, 11.8
The top ten holdings above match well with those of similarly marketed funds, albeit with one crucial difference - the proliferation of banks in the list of holdings. With three financial service providers in the top ten (DBS, ING and Mitsubishi), it would surprise me greatly if Vanguard were not exposed to secondary emissions through these firms. After all, even if Vanguard has sustainably sound practices, but invests in firms with little regard for the environment, they cannot be commended for their ESG investing at all. In particular, ING Groep, with an ESG score of 22.6 represents a very middle of the road score for a financial provider, hardly indicative of a sustainable firm. Furthermore, Merck and Co are hardly the most sustainable of firms - indeed their goal to be ‘climate neutral’ by 2040 shows a decided lack of ambition, even if it may be realistic. With so many firms falling short of their targets, it would be more advisable to set a far more adventurous one, even if they then fall short they would likely beat the 2040 date outlined in their sustainability manifesto. Furthermore, there are no firms in the top ten that actively pursue sustainability - once more a misleading exclusion in my opinion. A sustainable fund should target those firms that go above and beyond, not just the best of a bad bunch. As such, a rating of 0.7 planets seems adequate.
Vanguard stresses that the first principle of their ‘sustainable’ fund is to ensure long term (5 year +) growth, whilst the way they approach including sustainability clearly plays second fiddle. The sustainability policy they use ensures that the following are excluded from potential investments - tobacco, thermal coal, oil sands, nuclear / controversial weapons - and also considers on a wider basis a company's alignment with Vanguard’s stewardship assessment, as well as net zero and carbon footprint targets. All this sounds promising, but there are some crucial ways in which the fund falls short of transparency and sustainable practice. Firstly, the excluded firms are calculated as those that derive revenue “above certain thresholds” from the prohibited goods previously described - there is no mention of the specific value of the threshold, indeed it is unequivocally the case that a firm that derives even 10% of revenue from thermal coal should not be considered in a ‘sustainable fund’. Furthermore, what constitutes their stewardship policy is completely inaccessible information, and so as consumers we have very little idea of the bulk of their selection process. Finally, we must reference the index Vanguard uses as the benchmark for the carbon intensity of this fund, the FTSE All-World Index. This index sets a remarkably easy challenge to the fund managers (who are undisclosed), who have only to invest in companies with lesser carbon intensity than a collection of companies selected on market cap and growth, rather than those with any consideration of sustainability. I would strongly challenge all fund managers and firms to remove this similar methodology from their sustainable funds. I find it very hard to reward this methodology any more than 0.4 planets.
The management of the fund itself is subcontracted to Wellington Management, an investment management firm based in Boston. This is not clearly signposted on Vanguard’s website, indeed one has to dig around in the prospectus to uncover this fact. Nevertheless, the fact that Wellington management are tasked with this fund is not necessarily a bad thing. Wellington has an impressive looking sustainability message on their website, and have just recently struck an innovative deal with Enel Green Power NA to ensure that all their U.S employees have their homes and offices supplied with green energy. Hopefully this rollout continues to their offices across the globe. However, it is very difficult to find any information on the makeup of the board, or executive team for Wellington Management, which makes it hard to accurately assess their social practices and corporate culture. I would argue that a firm that discloses this information in an accessible manner is always more trustworthy than one who hides it, even if the makeup of their board may be more socially inclusive. As for Vanguard, their environmental promises are similarly impressive, although they have less evidence of prior success, something that I believe is invaluable to judging the environmental responsibility of a firm - it is nigh on impossible these days to find a firm which does not pledge itself to lofty environmental aims, and so cynicism is always required. Vanguard’s board of directors constitutes one third women, and one sixth are members of a racial/ethnic minority group. Out of the twelve managing directors, three are female, and three are racial/ethnic minorities, so a relatively similar distribution to the board of directors. Both of these are not particularly egregious, and Vanguard has a very strongly worded message outlining how they are going to ensure this moves in the right direction - overall, a good mark for Vanguard here. In total, across the two firms responsible for the management of this fund, it is hard to see either going above and beyond, both have notable pros, and notable cons. As such, a score of 1 planet is adequate.