Vanguard Target Retirement 2065 Fund VLXVX Sustainability

Vanguard Target Retirement 2065 Fund may not appeal to sustainability-conscious investors.

Vanguard Target Retirement 2065 Fund's holdings are exposed to average levels of ESG risk relative to those of its peers in the Target Date 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 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.

Vanguard Target Retirement 2065 Fund has a Carbon Risk Score of 8.98, indicating portfolio companies face low carbon-related risks in the transition to a low-carbon economy.

One potential issue for a sustainability-focused investor is that Vanguard Target Retirement 2065 Fund doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. The fund's current involvement in fossil fuels reaches 8.92%, surpassing 8.57% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas.

The fund exhibits moderate exposure (7.73%) 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.

Passive ESG-focused strategies at Vanguard number around 20 across the United States, Europe, and Australia, but they amount to only a fraction of assets under management, and most use negative screens to exclude companies in controversial industries and those that run afoul of ethical and environmental standards. In practice, the screens of these strategies do not differentiate the funds from their broader universes as much as peers that explicitly integrate ESG criteria to select companies with positive ESG characteristics.

Vanguard’s in-house fixed-income group has a six- to seven-person ESG committee that leverages third-party ratings to assign an ESG risk rating of Low, Medium, and High to each issuer. But the firm’s virtual indexing approach even within most of its active bond strategies keeps any ESG tilts fairly modest.

Using external subadvisors for most of Vanguard’s actively managed equity strategies results in a wide range of ESG approaches. Morningstar ESG Commitment Levels at the strategy level assess those approaches and firms for Vanguard’s single-subadvisor funds, but three of Vanguard’s largest subadvisory relationships are worth noting here. While Primecap’s long-term focus on value-creating businesses aligns with many sustainable-investing frameworks, Primecap is reticent to incorporate standardized ESG metrics into its company evaluation process. Wellington, on the other hand, has sought to do just that to some degree for all its strategies and since mid-2019 has run the fully integrated Vanguard Global ESG Select Stock VESGX. Baillie Gifford, too, has a maturing sustainable-investing approach, and in 2022 Vanguard plans to adopt one of Baillie Gifford’s previously existing strategies and rename it the Vanguard Baillie Gifford Global Positive Impact Stock Fund.

The Baillie Gifford strategy is an early sign of the influence of Vanguard’s recently formed ESG global product team, headed by firm veteran Matthew Piro. Buttressed by the expertise of experienced hires, like Fong Yee Chan, this team has the potential not just to add other appealing ESG options to Vanguard’s lineup but also to refine the ESG evaluation of current subadvisors. Even so, Vanguard is likely to remain tolerant of varying ESG commitments within its equity lineup. Moreover, disclosure of ESG metrics and risks for Vanguard products across the board are still lacking.

Active ownership is a bright spot at Vanguard through its investment stewardship team, whose membership grew from 35 in 2020 to around 60 by the end of 2021. In that year’s first half alone, this group engaged more than 700 companies in 29 countries on ESG issues and voted on nearly 140,000 proposals while providing commentary on key votes. Yet, the team was undersized previously, many members are new to their roles, and support of key ESG resolutions has risen but continues to be lower than other big asset managers.