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Vanguard ESG International Stock ETF VSGX Sustainability

Morningstar Medalist Rating
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Sustainability Analysis

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Sustainability Summary

 | Published as of .  Based on data as of

Vanguard ESG International Stock ETF has a number of positive attributes that a sustainability-focused investor may find appealing.

Vanguard ESG International Stock ETF's holdings are exposed to average levels of ESG risk relative to those of its peers in the Global Equity Large Cap category, thus earning it an average Morningstar Sustainability Rating of 3 globes. Competing funds in the category with ratings of 4 or 5 globes have less ESG risk in their holdings. Unlike impact, which measures positive environmental and societal outcomes attributable to an investment, ESG risk reflects the degree to which investments could be affected by material ESG issues, including climate change, biodiversity, product safety, community relations, data privacy and security, bribery and corruption, and corporate governance.

Vanguard ESG International Stock ETF has a sustainability or ESG-focused mandate. Funds with an ESG-focused mandate are more likely to align with the expectations of an investor who cares about sustainability issues. One key area of strength for Vanguard ESG International Stock ETF is its low Morningstar Portfolio Carbon Risk Score of 7.57 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation. Thus, the companies held in the portfolio are in general alignment with the transition to a low-carbon economy.

By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, thermal coal, and and small arms. The fund fulfills this goal by having negligible investment exposure to each of these activities. The fund aims to avoid, or limit exposure to, companies in violation with international norms, such as the UN Global Compact or the Universal Declaration of Human Rights.

The fund's 8.7% involvement in carbon solutions is roughly in line with the 8.8% average involvement of its peers in the Foreign Large Blend category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on. The fund exhibits moderate exposure (4.40%) to companies with high or severe controversies. Controversies are incidents that have a negative impact on stakeholders or the environment, which create some degree of financial risk for the company. Examples of types of controversies include bribery and corruption scandals, workplace discrimination and environmental incidents. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. Such controversies can also damage the reputation of both companies themselves and their shareholders.

ESG Commitment Level Asset Manager

 | Low  

Vanguard is an exemplary asset manager in many ways, but not when it comes to environmental, social, and governance issues. The firm’s inconsistent integration of ESG factors, paucity of dedicated ESG specialists, and low support for key ESG shareholder resolutions warrant a Morningstar ESG Commitment Level of Low. Vanguard signed the United Nations-supported Principles for Responsible Investment in 2014 and offers ESG-focused funds—its first, Vanguard FTSE Social Index VFTNX, was launched in 2003. However, the firm hasn’t since made much progress compared with peers. Furthermore, the firm's decision to depart from the Net Zero Asset Managers initiative in 2022, less than two years after originally signing, is a discouraging sign for the firm's ESG ambitions. Although other firms have delineated portfolio decarbonization plans while not signing on to NZAMI, Vanguard has yet to offer a clear decarbonization strategy after leaving the initiative. Passive ESG-focused strategies amount to only a fraction of Vanguard’s assets under management, and most use screens to exclude companies in controversial industries and those that run afoul of environmental or social standards. In practice, this process does not differentiate the funds from their broader universes as much as peers that explicitly integrate ESG criteria to select companies with positive sustainability characteristics. Moreover, disclosure of ESG and carbon-related metrics for Vanguard products is lacking across the board. The firm relies chiefly on subadvisors, including Advanced-rated Wellington Management and Basic-rated Baillie Gifford, to steer its actively managed equity strategies, which comprise roughly 5% of Vanguard’s total assets. This may lead to higher degrees of ESG consideration on these funds, but Vanguard does not require a specific level of integration nor coordinate these efforts at the enterprise-level. Although much of the firm's actively managed fixed income is run by in-house teams, this group's approach to ESG integration is rudimentary compared with peers. Since Vanguard’s book of business primarily consists of index-tracking strategies, the main avenue for acting on ESG risks is through activities such as proxy voting and company engagement, otherwise known as active ownership. Although the firm’s record of support for key ESG shareholder resolutions continues to be lower than comparable peers, its disclosure of the rationale behind such voting decisions is strong. Investors can find highlights of engagement activities in semiannual stewardship reports. Changes are also afoot to give shareholders a bigger voice in the conversation. As part of a new pilot program launched in 2023, investors in three Vanguard equity index funds now have four proxy-voting policies to choose from. This is a new foray with an uncertain future, but it may be a step in the right direction. All told, the firm’s efforts fall short compared with peers.