Vanguard Emerging Mkts Govt Bd Idx Fund's holdings are exposed to average levels of ESG risk relative to those of its peers in the Emerging Markets Fixed Income 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. ESG risk provides investors with a signal that reflects to what degree their investments are exposed to risks related to material ESG issues, including climate change, biodiversity, product safety, community relations, data privacy and security, bribery and corruption, and corporate governance, that are not sufficiently managed. ESG risk differs from impact, which is about seeking positive environmental and social outcomes.
One potential issue for a sustainability-focused investor is that Vanguard Emerging Mkts Govt Bd Idx Fund doesn’t have an ESG-focused mandate. A fund with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. An ESG issue worthy of special attention is Vanguard Emerging Mkts Govt Bd Idx Fund's carbon risk exposure. The fund’s asset-weighted Carbon Risk Score of 44.4 is classed as high. Investee companies of this portfolio are therefore positioned to fare poorly in the transition to a low-carbon economy. Investments with high carbon risk classification will likely be disadvantaged in the transition to net zero, while those with low or negligible carbon risk may fare better. Currently, the fund has 84.6% involvement in fossil fuels, which is high in both absolute and relative terms. The fossil fuel involvement of funds in the same Emerging Markets Bond category averages 39.8%. Companies are considered involved in fossil fuels if they derive at least 5% of their revenue from thermal coal, oil, and gas. The fund has extremely high exposure (36.89%) to companies with high or severe controversies. From bribery and corruption to workplace discrimination and environmental incidents, controversies are incidents that have a negative impact on stakeholders or the environment, which create some degree of financial risk for the company. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, they can damage the reputation of both companies themselves and their shareholders.