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Morningstar

Vanguard Total Intl Stock Index I VTSNX Sustainability

Morningstar Medalist Rating
| Medalist Rating as of | See Vanguard Investment Hub

Sustainability Analysis

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Sustainability Summary

 | Morningstar Manager Research  

Vanguard Total Intl Stock Idx Fund is likely to concern sustainability-focused investors given certain substandard ESG attributes.

This fund has above-average exposure to ESG risk relative to its peers in the Global Equity Large Cap category, earning it the second-lowest Morningstar Sustainability Rating of 2 globes. Investors concerned about ESG risk may be better off with funds earning 4 or 5 globes, as they 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.

One potential issue for a sustainability-focused investor is that Vanguard Total Intl Stock Idx Fund doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes.

Vanguard Total Intl Stock Idx Fund has an asset-weighted Carbon Risk Score of 10.38. This is situated at the lower end of the medium carbon risk band, suggesting that its current equity and/or bond holdings are moderately positioned to transition to a low-carbon economy. Investors concerned about the transition risks may prefer to consider funds with negligible or low carbon risk. Such funds invest in companies that tend to operate in sectors less exposed to the transition (such as healthcare and IT) and/or companies in more carbon-intensive sectors (such as industrials and utilities) but that consider climate change in their business strategy and products, and therefore are positively aligned with the transition. Currently, 8.76% of the fund's assets are involved in fossil fuels. This percentage is on par with 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 has a modest level of exposure (6.47%) to companies with high or severe controversies. Companies with high or severe controversies are involved in incidents such as corruption, employee abuses, environmental incidents, and corporate scandals that pose serious business risks to the company.

ESG Commitment Level Asset Manager

 | Low , 

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.