This fund has the second-lowest Morningstar Sustainability Rating of 2 globes, indicating it holds securities with relatively high ESG risk compared to that of its peers in the Emerging Markets Fixed Income category. Funds with 4 or 5 globes tend to hold securities that are 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.
One potential issue for a sustainability-focused investor is that Vanguard Emerging Markets Bond Fund doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. One area to watch is the fund's high carbon risk exposure, as indicated by its Carbon Risk Score of 35.9, suggesting that the portfolio is positioned to fare poorly in the transition to a low-carbon economy. This score represents the asset-weighted carbon risk score of the portfolio holdings, averaged over the trailing 12 months. Companies with high risk classification will likely be disadvantaged in the transition to net zero, while those that are less exposed to climate risks and enable the transition by offering carbon solutions may fare better. Currently, the fund has 58.5% involvement in fossil fuels, which is high in both absolute and relative terms. The average peer in the same Emerging Markets Bond category has 39.8% exposure to fossil fuel-related businesses. 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 (34.53%) 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.