Vanguard ESG U.S. Stock ETF – In-Depth ESGV Review Using ESG Rating Agencies’ Data
The most popular ESG ETF from Vanguard, ESGV, does not perform well when it comes to ESG ratings. ESGV is highly correlated to VTI, a non-ESG ETF. Adding to that, ESGV top holdings have ESG ratings that are well below the average expected for an effective ESG ETF.
Vanguard ESG U.S. Stock or ESGV ETF was created by Vanguard in September 2018 and currently has USD 3 billion in assets, making it the largest ESG ETF from this issuer. This ETF tracks the ‘FTSE US All Cap Choice Index’ and has the objective to track US all-cap companies, screening for certain environmental, social, and corporate governance (ESG) criteria.
ESGV has more than doubled its assets, adding USD 1.6 billion during 2020, benefiting from the boom in ESG investments, and the increasing interest of investors in sustainable finance. However, the ESGV ETF is far from being an ESG role-model. We have previously looked into Vanguards ESG ETFs and concluded that ESGV is well below its ETF peers when it comes to sustainable performance.
Now let us do an in-depth ESGV review to better understand why its ESG performance is so weak. We will look into its holdings, evaluate its exclusions and compare ratings given by different ESG Rating agencies (MSCI, Sustainalytics, and Refinitiv).
The FTSE Choice Index
As mentioned above, ESGV ETF tracks the ‘FTSE US All Cap Choice Index’, which has an exclusionary strategy. The index only excludes companies involved in controversial businesses: adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power. On top of that it also “excludes stocks of certain companies that do not meet standards of U.N. Global Compact Principles and companies that do not meet certain diversity criteria.”
At first, this might sound like a good approach. However, we have previously assessed the ‘FTSE Choice Index’ family, and knowing how it works, we can expect those exclusions to have a very limited impact on ESGV ETF. More importantly, by taking an exclusionary approach, the index does not create a positive impact on society or the environment, it only avoids the worse companies out there.
ESGV vs. VTI: How similar are those Vanguard ETFs?
Being ESGV a US all-cap ETF, we can quickly relate it to Vanguard Total Stock Market, the famous VTI ETF with more than USD 200 billion in assets. (Note: VTI does not cover the totality of the stock market, only the US stock market).
Let us look into how does ESGV compares to VTI:
Comparison of holdings
The ETF Research Center offers a great tool to assess how two ETFs overlap. According to ETF Research Center, there is an overlap of 1,409 holdings between ESGV and VTI. The Vanguard ESG US has a total of 1,464 holdings. This means that 96.5% of the ESGV holdings are present in VTI. This is expected since ESGV is created by excluding companies from VTI.
However, the overlap is also high by weight, 80%. This indicates that the shares of each holding are also very similar. The main distinctions are in the technology and energy sectors. When compared to VTI, ESGV is overweighted in the Technology sector and underweighted in the Energy sector.
When we look at the top holdings of each ETF, the similarities are even more clear. Out of ESGV top 20 holdings, 16 are present in the top 20 holdings of VTI.
|ESGV top holdings||% of share||VTI top holdings||% of share|
|Apple inc (AAPL)||6.6%||Apple Inc (AAPL)||5.3%|
|Microsoft Corp (MSFT)||5.4%||Microsoft Corp (MSFT)||4.4%|
|Amazon.com Inc (AMZN)||4.4%||Amazon.com Inc (AMZN)||3.6%|
|Alphabet C (GOOG)||2.1%||Facebook Inc A (FB)||1.7%|
|Tesla Inc (TSLA)||2.0%||Tesla Inc (TSLA)||1.4%|
|Facebook A (FB)||2.0%||Alphabet Inc A (GOOGL)||1.4%|
|Alphabet A (GOOGL)||1.3%||Alphabet Inc Class C (GOOG)||1.3%|
|JPMorgan Chase & Co. (JPM)||1.2%||Johnson & Johnson (JNJ)||1.1%|
|Visa (V)||1.0%||Berkshire Hathaway Inc Class B (BRK/B)||1.1%|
|Walt Disney (DIS)||1.0%||JPMorgan Chase & Co (JPM)||1.0%|
|Unitedhealth Group (UNH)||1.0%||Visa Inc Class A (V)||1.0%|
|NVIDIA Corp (NVDA)||1.0%||Procter & Gamble Co (PG)||0.9%|
|Procter & Gamble (PG)||1.0%||UnitedHealth Group Inc (UNH)||0.9%|
|Mastercard (MA)||0.9%||The Walt Disney Co (DIS)||0.9%|
|Paypal Holdings (PYPL||0.9%||Mastercard Inc A (MA)||0.8%|
|The Home Depot (HD)||0.9%||NVIDIA Corp (NVDA)||0.8%|
|Bank of America (BAC)||0.7%||The Home Depot Inc (HD)||0.8%|
|Intel (INTC)||0.7%||PayPal Holdings Inc (PYPL)||0.7%|
|Adobe (ADBE)||0.7%||Verizon Communications Inc (VZ)||0.6%|
|Netflix (NFLX)||0.7%||Comcast Corp Class A (CMCSA)||0.6%|
The main companies that are present in VTI, but have been excluded in ESGV are listed below with their respective main reason for exclusion. In total, those companies represent about 5% of the VTI shares:
- Johnson & Johnson – animal testing
- Berkshire Hathaway Inc – fossil fuels
- Exxon Mobil Corp – fossil fuels
- Wal-Mart Stores Inc – weapons
- Chevron Corp – fossil fuels
- Nextera Energy Group – fossil fuels
- Honeywell International Inc – weapons
- Philip Morris International – tobacco
- Wells Fargo & Co – fraud
- Boeing Co – fossil fuels
ESGV vs. VTI: How similar are their ESG Ratings?
MSCI is the main rating agency to provide ESG ratings for funds. Below we can see how ESGV and VTI have extremely similar MSCI ESG ratings. The main differences are on exposure to carbon emissions, (affecting the weighted average carbon intensity and brown revenue numbers), and controversies.
|ETF Name||Vanguard ESG U.S. Stock||Vanguard Total Stock Market|
|MSCI ESG Rating||BBB||BBB|
|% of ESG laggards||8%||8%|
Morningstar also provides ESG ratings for funds. It uses data from Sustainalytics to access the sustainability scores of an ETF portfolio. Again the ESG ratings for VTI and ESGV are very similar.
How do MSCI, Sustainalytics, and Refinitiv rate companies on ESG?
Enough comparing ESGV with VTI. It is clear that ESGV has a weak sustainability mandate. Let look into how the holdings present in ESGV ETF perform in ESG.
Three ESG rating agencies publicly disclose ratings for thousands of listed companies. Those rating agencies are MSCI, Sustainalytics, and Refinitiv. We will use their ESG ratings to assess the sustainability performance of ESGV top holdings.
Before getting to the results, let us quickly look into how each one of those agencies rate a company.
MSCI was the first agency to disclose its ratings publicly. It measures a company’s resilience in the long term and assesses its environmental, social, and governance risks. They rank the company in three main blocks according to a company risk exposure and risk management relative to peers:
- Leader (ratings AA, AAA): company leads the industry by managing the most relevant ESG risks
- Average (ratings BB, BBB, A): a company with an unexceptional performance of managing ESG risks
- Laggard (rating CCC, B): company lagging its industry and high exposure to ESG risks
MSCI also reports on:
- ESG Rating history: 5-year history of the company ESG ratings
- ESG Rating distribution: distribution of ETF constituents along the MSCI ESG spectrum (CCC to AAA)
- The materiality of issues: indicates which business activities are behind its peers (laggard), within average, and above average (leader)
Sustainalytics has a rating framework that is based on 20 material ESG issues, which are composed of more than 300 indicators and 1,300 data points. They separate their assessment into three building blocks:
- Corporate governance: considers board quality and shareholders’ rights. The assessment is industry-specific.
- Material ESG issues: exposure is determined by subindustry characteristics. Ratings are adjusted according to a company’s portfolio, finances, geographic footprint, and track record.
- Idiosyncratic issues: applicable to exceptional cases, when a company is involved in controversies beyond its subindustry scope.
Different that the other ESG rating agencies, Sustainalytics reports on ESG risk, meaning that higher ratings indicate higher risks.
Once their assessment is concluded, they rate a company within five levels of risk:
- Negligible: 0-10 points
- Low: 10-20 points
- Medium: 20-30 points
- High: 30-40 points
- Severe: 40+ points
Sustainalytics indicates that the highest possible rating is 100. However, we couldn’t find any company with an ESG Risk Rating higher than the 56.4 from PetroChina.
Sustainalytics also reports on:
- Ranking: the company rank at industry group and a global universe
- Exposure: extent to which a company is exposed to different material ESG issues
- Management: how well a company is managing its relevant ESG issues
- Top material issues: list of main material issues that the company is exposed to
- Controversy ratings: indicates events leading to controversy levels
When it comes to the ESG ratings, Refinitiv offers the most transparency, disclosing all the sub-ratings within Environmental, Social, and Governance, that lead to the final ESG ratings of a company. Their ratings are “designed to transparently and objectively measure a company’s relative ESG performance, commitment and effectiveness across 10 main themes, based on publicly available and auditable data.”
Overall a company is placed within four ESG scoring ranges:
- First quartile (0 to 25 points): indicates poor relative ESG performance and insufficient degree of transparency in reporting material ESG data publicly.
- Second quartile (25 to 50 points): indicates satisfactory relative ESG performance and a moderate degree of transparency in reporting material ESG data publicly.
- Third quartile (50 to 75 points): indicates good relative ESG performance and above-average degree of transparency in reporting material ESG data publicly.
- Fourth quartile (75 to 100 points): indicates excellent relative ESG performance and a high degree of transparency in reporting material ESG data publicly.
Refinitiv also reports on: Comparison and Rank, the ranking of a company out of all the companies in its industry
In-depth ESGV review of top holdings
Using the ESG Ratings from MSCI, Sustainalytics, and Refinitiv, let us assess how ESGV top holdings perform in ESG.
Below we have the raw data, showing how each company is rated. Sustainalytics and Refinitiv disclose separate scores for E, S, and G. Sustainalytics total ESG ratings is a simple sum of E, S, and G scores. Refinitiv total ESG rating is a weighted-sum.
|Holdings||MSCI||Sustainalytics 'E'||Sustainalytics 'S'||Sustainalytics 'G'||Sustainalytics Total||Refinitiv 'E'||Refinitiv 'S'||Refinitiv 'G'||Refinitiv Total|
|Apple Inc (AAPL)||BBB||0.1||7.6||8.8||16.5||57||63||83||67|
|Microsoft Corp. (MSFT)||AAA||0.5||9.4||4.9||14.8||79||98||94||93|
|Alphabet C (GOOG)||BBB||0.5||9.9||12.5||22.9||75||89||45||67|
|Alphabet A (GOOGL)||BBB||0.5||9.9||12.5||22.9||75||89||45||67|
|JPMorgan Chase (JPM)||BBB||1.0||16.1||10.8||27.9||81||83||80||82|
|Walt Disney (DIS)||BBB||0.0||8.1||8.1||16.2||56||81||80||77|
|Unitedhealth Group (UNH)||BB||0.0||15.4||5.9||21.3||81||57||89||73|
|Procter & Gample (PG)||A||8.0||9.0||7.0||24.0||89||77||45||72|
|Paypal Holdings (PYPL)||A||0.0||11.0||7.0||18.0||44||70||80||71|
|Home Depot (HD)||AA||3.0||5.0||4.0||12.0||90||74||69||75|
|Bank of America (BAC)||BB||2.0||14.0||11.0||27.0||86||90||68||81|
|Abbott Laboratories (ABT)||BB||3.0||16.0||11.0||30.0||0||22||58||25|
|Thermo Fisher Scientific (TMO)||BBB||2.0||10.0||7.0||19.0||69||75||60||69|
|Merck & Co. (MRK)||A||1.0||11.0||10.0||22.0||80||93||64||81|
|Cisco Systems (CSCO)||AA||1.0||6.0||6.0||13.0||71||93||92||88|
The table above is great to understand the ESG ratings of each company in detail, however, it does not allow for comparison among the three agencies.
We have made a few adjustments to reach a final percentage rating:
- MSCI: place the letter ratings within a 7-point scale, from 14% (CCC) to 100% (AAA)
- Sustainalytics: calculate the ESG ratings as the relative difference to a maximum of 60 points: 100% – ESG Risk/60 (Note: theoretical maximum risk ratings is 100, however, unheard of. 60 points already indicate a very severe ESG risk.)
- Refinitiv: the easy one. Only changed to a percentage, since the ESG rating is given out of 100 points.
With the adjustment above we can then compare the final ESG scoring results for ESGV top holdings:
|Apple Inc (AAPL)||57%||73%||67%||66%|
|Microsoft Corp. (MSFT)||100%||75%||93%||89%|
|Alphabet C (GOOG)||57%||62%||67%||62%|
|Alphabet A (GOOGL)||57%||62%||67%||62%|
|JPMorgan Chase (JPM)||57%||54%||82%||64%|
|Walt Disney (DIS)||57%||73%||77%||69%|
|Unitedhealth Group (UNH)||43%||65%||73%||60%|
|Procter & Gample (PG)||71%||60%||72%||68%|
|Paypal Holdings (PYPL)||71%||70%||71%||71%|
|Home Depot (HD)||86%||80%||75%||80%|
|Bank of America (BAC)||43%||55%||81%||60%|
|Abbott Laboratories (ABT)||43%||50%||25%||39%|
|Thermo Fisher Scientific (TMO)||57%||68%||69%||65%|
|Merck & Co. (MRK)||71%||63%||81%||72%|
|Cisco Systems (CSCO)||86%||78%||88%||84%|
There is no consensus on what a good ESG ratings is. The higher, the better. However, we can assume that ratings above 75% are good ESG ratings since they will represent: A from MSCI, low-risk rating (15 points) from Sustainalytics, and good relative performance (third quartile) from Refinitiv. Alike, ratings below 50% represent an inferior ESG performance.
Overall, ESGV top 30 holdings do not have impressive ESG ratings. There are only 8 holdings out of 30 with a ratings above 75%. Microsoft is the best one with 89% followed by Nvidia with 85% and Cisco with 84%. The worse companies are Abbott Laboratories with 39%, Facebook with 43%, and AT&T with 44%.
It is important to point out as well that there is no consensus among the ESG rating agencies MSCI, Sustainalytics, and Refinitiv. We see some cases with extreme divergences. Two examples are AT&T that receives an ESG rating of 68% from Sustainalytics and 20% from Refinitiv, and Netflix that receives a rating of 70% from Sustainalytics and 28% from Refinitiv.
Is ESGV a good investment?
ESGV ETF from Vanguard is not a good investment for sustainable investors. Its investment strategy is based on an index with a limited exclusionary approach and a weak sustainability mandate. ESGV is highly correlated to Vanguard Total Stock Market ETF (VTI), a traditional non-ESG ETF. Moreover, ESGV top holdings have unimpressive ESG ratings, mostly below 75%.
Unfortunately, sustainable investors will have to look beyond Vanguard’s portfolio of ETFs to find better ESG ETF options.
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