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.
Sustainability Analysis
Sustainability Summary
Sustainability Summary is not assigned to this investment.
Morningstar generates quantitatively driven content that covers the Environmental, Social, and Governance (ESG) characteristics for managed investments that have both a Morningstar Sustainability Rating and a Carbon Risk Score, called the Sustainability Strategy Summary. This share class’ Sustainability Summary content was not generated because of insufficient data. To generate individualized content, the Sustainability Summary requires sufficient data to create its framework of “mental models” designed to mimic content written by analysts. The Sustainability Strategy Summary uses an algorithm designed to predict the ESG analysis that analysts would produce on the investment product if they covered it.