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Vanguard ESG ETFs and mutual funds are not sustainable enough and the main reason is their investment strategy. Vanguard ESG ETFs strategy is limited to excluding compaines in controversial businesses (exclusionary apprach), instead of prioritising companies with high ESG ratings (inclusionary approach).

Intro

Vanguard is the second-largest provider of exchange-traded funds with USD 6.2 trillion in assets under management (AUM). The company is well known in the investment industry due to its founder and former chairman John Bogle and his credit as creator of the first index fund for individual investors and as the major enabler of low-cost investing.

Despite its huge success as an ETF provider, Vanguard lags behind its main competitor BlackRock, when the subject is sustainable ETFs (exchange-traded funds). While iShares implements ESG integration by selecting the companies with the best ESG ratings, Vanguard’s approach to ESG investing is only exclusionary, mainly excluding stocks of certain companies that have operations in controversial industries.

If sustainable investing is a new concept for you, go check out our guide on How to Become a Modern Sustainable Investor in 5 Steps

Which sustainable or ESG ETFs does Vanguard offer?

In June 2020, Vanguard launched two new ESG ETFs, trying to complement its somewhat limited sustainable ETF portfolio (VAEIAGI and VAEAIIE). Currently, Vanguard offers globally five sustainable ETFs, however, domiciled at different locations.

The five Vanguard ESG ETFs are:

• Vanguard ESG U.S. Stock ETF (ESGV)
• Vanguard ESG International Stock ETF (VSGX)
• Vanguard SRI European Stock Inst EUR (VGSESAG)
• Vanguard ESG Developed World All-Cap Equity Index (VAEIAGI)
• Vanguard ESG Emerging Markets All-Cap Equity Index (VAEAIIE)

At the table below we include more details, such as ESG strategy, geographic coverage and domicile:

Note: Vanguard FTSE Social Index Fund Admiral Shares (VFTAX) the largest ESG fund from Vanguard with USD 7.9 billion AUM that tracks FTSE4Good US Select Index is a mutual fund managed by Vanguard Admiral and not an ETF.

Vanguard’s definition of ESG investing

Vanguard has a dedicated page about ESG investing where they elaborate on the reasons behind ESG investing, list some of their products, and describe different ESG strategies.

In summary, Vanguard defines four ESG strategies for socially conscious investors:

1. ESG integration: Includes ESG factors alongside traditional investment analysis. This strategy does not require the fund to rule out any company, industry, or country involved in controversial activities
2. Portfolio screening:
   • Exclusionary:  excludes or under weighs certain sectors, countries, and securities
   • Inclusionary: invests in sectors or companies with higher ESG ratings than their industry peers or other investment opportunities
3. Advocacy: Uses resources to positively influence corporate behavior on ESG-related issues
4. Impact investing: Targets investments, often made in private markets, to generate positive societal or environmental impact and a financial return

However, from their website, we can see that except for their global mutual fund ‘Global ESG Select Stock Fund’ (VEIGX), all other ETFs practice “exclusionary” ESG strategies. This means that Vanguard, or the index sponsor, is not practicing inclusionary strategies nor ESG integration.

Vanguard is clear stating that the index is composed of stocks that are:

“screened for certain environmental, social, and corporate governance (ESG) criteria by the Index sponsor, which is independent of Vanguard.”

When we dig deeper into Vanguard’s ESG ETFs we can see that most of their products, which are passive investments, are following a reference index. In this case, the reference index for Vanguard ESG ETFs is provided by FTSE Russell and is part of the FTSE Global Choice Index Series.

One exception is Vanguard SRI European Stock Inst EUR, the oldest Vanguard sustainable ETF established in 2011, which is not referenced to the Choice Index Series.

In this table we can see Vanguard ESG ETFs and their respective indexes from FTSE Russell:

ETF Name	Bloomberg Ticker	Reference index
Vanguard ESG U.S. Stock	ESGV	FTSE US All Cap Choice Index
Vanguard ESG International Stock	VSGX	FTSE Global All Cap ex US Choice Index
Vanguard SRI European Stock	VGSESAG	FTSE Developed Europe Index
Vanguard ESG Developed World All-Cap Equity Index	VAEIAGI	FTSE Developed All Cap ex Controversies/ Non-Renewable Energy/ Vice Products/ Weapons Index
Vanguard ESG Emerging Markets All-Cap Equity Index	VAEAIIE	FTSE Emerging All Cap ex Controversies/ Non-Renewable Energy/ Vice Products/ Weapons Index

The Problem with FTSE Choice Index

FTSE Choice Global Choice Index Series is a framework “for applying robust and customizable values-based exclusions to a broad market index”. It includes negative screenings in three product categories and two conduct categories:

The product-related screening category covers:

• Non-Renewable Energy (Fossil Fuel and Nuclear Power)
• Vice Products (Adult Entertainment, Alcohol, Gambling, and Tobacco)
• Weapons (Chemical & Biological Weapons, Cluster Munitions, Anti-Personnel Landmines, Nuclear Weapons, Conventional Military Weapons, and Civilian Firearms)

The conduct-related screening category covers:

• Controversies (based on the UN Global Compact Principles)
• Diversity practices

Despite mentioning in their Ground Rules report that FTSE Choice Index “takes into account ESG factors in its index design”, it is not clear if or how those are implemented into the Choice Index Series. Moreover, FTSE ESG Ratings are not disclosed at the index fact sheet.

As an example, we can see that FTSE US All Cap Choice Index, the reference index for Vanguard ESG U.S. Stock ETF (ESGV), excluded only 17% of the holdings and has the same Top 10 holdings as its “non-Choice” counterpart (FTSE USA All Cap).

The only visible benefit of FTSE US All Cap Choice Index is a reduction of 2.6% in the allocation to the Oil & Gas sector and an increase of 4.1% in allocation to the Technology sector.

How sustainable are Vanguard ESG ETFs?

Aware that FSTE Russell does not disclose ESG ratings for its Choice Index Series and that Vanguard does not have an internal ESG rating, the best proxy available for evaluating the ETF sustainability performance is MSCI Fund Ratings.

Vanguard’s most recent funds, VAEIAGI and VAEAIIE, have received MSCI ratings of ‘A’ and ‘BBB’ . Out of five funds, Vanguard SRI European Stock Inst EUR is the best performer with an ESG rating of ‘AA’ and a Global rank at 93th percentile. However, this fund does not exclude fossil fuel companies, resulting in 4.1% of its revenues coming from brown energy sources and, consequently, a carbon intensity of 154 tons CO2e/M$ sales.

Out of the remaining three ETFs, the best Vanguard sustainble ETF is Vanguard ESG International Stock (VSGX) . However, it’s ESG performance is not great, being the best factor its MSCI Global Rank.

Vanguard ESG U.S. Stock (ESGV) is the second best option. Despite its bad MSCI ESG Rating of ‘BBB’ and terrible Global Rank, it has a low carbon intensity and low number of holdings with controversies.

How Does Vanguard Sustainable ETFs Compare to iShares?

To put things in perspective for this review we need to benchmark each Vanguard ESG ETF against the market. We have a full article about iShares sustainable ETFs and their sustainability KPIs.

In the tables below we do a quick reivew of the top two ETF providers, Vanguard and iShares, on a side-by-side comparison, using MSCI Fund Ratings to assess which is the most sustainable ETF:

Geographic coverage: US

When comparing sustainable ETFs that cover the US, we can see that even the 2nd most sustainable ETF from Vanguard in the US, ESGV ETF, is well below iShares SUAS, EDMU and SASU ETFs in MSCI Global Rank percentile. Again, the only benefit of ESGV ETF is its low carbon intensity.

‘YGW rank’ is an internal assessment from Your Green Wealth and is intended to be an indicative ranking based on sustainability KPIs from MSCI Fund Ratings

Geographic coverage: Global

When comparing more broad ETFs, with global coverage, Vanguard sustainable ETFs are at a clear disadvantage. VSGX have a decent MSCI ESG Rating of ‘A’ and Global Rank position (above 70th percentile). However, it has a higher carbon intensity (above 100 tons CO2e/M$ sales) and is exposed to an excessive amount of companies with severe controversies.

In this analysis, we place Vanguard ESG ETF with global coverage at the bottom of the table.

Geographic coverage: Europe

Looking at ETFs with European coverage, we encounter a similar situation. iShares ESG ETFs are more sustainable than Vanguard alternatives. VGSESAG has a high Global Rank percentile (93th), however, this is expected from stocks and ETFs with European coverage, where ESG criteria are more established. In all other indicators, the Vanguard ETF is performing worse than iShares alternatives.

At the YGW Rank, we place Vanguard SRI European Stock Inst EUR below iShares European ETFs.

Are Vanguard ESG ETFs a good investment?

Vanguard ESG ETFs are not a good investment for sustainable investors. Despite launching two new ESG ETFs, Vanguard’s approach to ESG and sustainable investing is mainly exclusionary, instead of inclusionary or integratory. This strategy does not promote companies that are making a difference, and consequently, improving their ESG performance.

Despite Vanguard ESG International Stock (VSGX) being the most sustainable ETF among the Vanguard ESG ETFs, its sustainability performance is limited.

If you are looking for sustainable ETFs, iShares ESG ETFs are still a better option, with a full portfolio of ETF options at different geographic coverage and different levels of ESG integration.

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FAQ

Does Vanguard have any green funds?

Vanguard does not have green funds that focus exclusively on green technologies or green companies. However, Vanguard has ESG ETFs and ESG mutual funds that “follow an exclusionary strategy that omits companies that don’t meet certain ESG criteria”.

Does Vanguard have any clean energy funds?

Vanguard does not have any clean energy funds. The only energy funds from Vanguard are:

• Vanguard Energy ETF (VDE)
• Vanguard Energy Fund Investor Shares (VGENX)
• Vanguard Energy Fund Admiral Shares (VGELX)
• Vanguard Energy Index Fund Admiral Shares (VENAX)

All Vanguard energy funds are heavily exposed to fossil fuel companies, with more than 90% of their assets allocated to oil and gas companies. The Vanguard energy funds have extremely high carbon intensity and do not focus on clean energy companies.

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