The ESG risk of Vanguard ESG USD Corporate Bond ETF's holdings is comparable to its peers in the US Fixed Income category, thus earning an average Morningstar Sustainability Rating of 3 globes. Funds in the same category rated 4 or 5 globes tend to hold securities less exposed to ESG risk. ESG risk measures the degree to which material environmental, social, and governance issues, such as climate change, biodiversity, human capital, as well as bribery and corruption, could affect valuations. ESG risk differs from impact, which is about driving positive environmental and social outcomes for society’s benefit.
Vanguard ESG USD Corporate Bond ETF promotes environmental and/or social characteristics in accordance with Article 8 of the Sustainable Finance Disclosure Regulation. Funds classified by their managers as aligning with Article 8 or Article 9 would have a higher probability to drive positive ESG outcomes. One key area of strength for Vanguard ESG USD Corporate Bond ETF is its low Morningstar Portfolio Carbon Risk Score of 6.36 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, and and thermal coal. The fund fulfills this goal by having negligible investment exposure to each of these activities.
The fund has relatively high exposure (10.58%) 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.
The fund's 7.4% involvement in carbon solutions is roughly in line with the 7.7% average involvement of its peers in the Other Bond category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on.