Vanguard Intl Div Apprec Idx Adm VIAAX Sustainability

Vanguard International Div Apprec Idx Fd may not appeal to sustainability-conscious investors.

The ESG risk of Vanguard International Div Apprec Idx Fd's holdings is comparable to its peers in the Global Equity Large Cap 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 and inequalities, could affect valuations. ESG risk differs from impact, which is about driving positive environmental and social outcomes for society’s benefit.

The fund has an asset-weighted Carbon Risk Score of 8.23, indicating that its current equity and/or bond holdings have low exposure to carbon-related risks. These are risks associated with the transition to a low-carbon economy such as increased regulation, changing consumer preferences, technological advancements, and stranded assets.

One potential issue for a sustainability-focused investor is that Vanguard International Div Apprec Idx Fd doesn’t have an 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. Currently, the fund has 8.67% involvement in fossil fuels, which is higher than 6.63% for the average peer in its category. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas.

The fund exhibits moderate exposure (3.00%) to companies with high or severe controversies. From bribery and corruption to workplace discrimination and environmental incidents, controversies are incidents that may negatively affect stakeholders, the environment, or the company’s operations.

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.