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Vanguard Bolsters its ESG Program in Bid to Become More Competitive

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Not every mutual fund company can be on the leading edge of investing trends, but every company can act quickly to catch up. That’s what Vanguard is attempting to do with its lineup of Environmental, Social, and Corporate Governance (ESG) funds. 

As MarketWatch noted in a recent article, Vanguard is beefing up its ESG program with an eye on offering more options in the future. The Valley Forge, Pennsylvania-based company recently created an ESG product category team in the United States, including two dedicated ESG product managers and three support staff. 

Across the Atlantic, in February Vanguard appointed Fong Yee Chan, the former director of sustainable investment products at FTSE Russell, as its first head of ESG strategy for the UK and Europe. In a newly created role, Chan will be responsible for evolving Vanguard’s approach to ESG in Europe to help it meet the demands of clients. She had previously spent nearly four years at FTSE Russell as a director for sustainable investment products in EMEA.

Vanguard’s recent moves reflect a desire to broaden its ESG reach and help it become more competitive with ESG leaders like Blackrock and Invesco.

Vanguard, founded in 1975, has long been known as a leader in low-cost funds. It offers about 440 traditional and exchange-traded funds (ETFs), has $7.2 trillion in global assets under management, and boasts more than 30 million investors in about 170 countries. 

But the company has been a fairly late entry in ESG investing, with just five ESG investment funds available in the U.S. compared with dozens at rival Blackrock and other firms. As Vanguard notes on its website, ESG investing has gone mainstream in recent years. In the U.S. alone, investors have access to more than 600 ESG funds and ETFs representing more than $160 billion in assets under management.

Some of the ESG funds Vanguard offers have shown encouraging signs. One is Vanguard Global ESG Select Stock (VEIGX), which launched in June 2019 as the company’s first actively managed ESG fund. The VEIGX seeks to invest in global mid-and large-cap companies with high financial productivity and leading ESG practices.

In a column for Morningstar last fall, analyst David Kathman said the VEIGX fund “has shown promise,” and gave it a Morningstar Analyst Rating of Bronze for both its Investor and Admiral shares.

“The fund has looked pretty good so far in its first 16 months of existence,” Kathman wrote. “Its returns have beaten the world large-stock Morningstar Category average and the FTSE All-World Index benchmark. Expenses are low, as one would expect of Vanguard, which remains a topnotch parent. All this is encouraging, but the fund will need to deliver over a longer time period to earn an Analyst Rating higher than Bronze.”

Like most fund managers, Vanguard takes a multi-pronged approach to ESG. On its website, the company lists the following five components in terms of ESG investment opportunities and risks:

  • Fixed Income Group: Vanguard’s global team of credit analysts develops independent risk assessments and investment opinions for each fixed income issuer. One of the main focuses here is to consistently apply an ESG integration framework to the investment decision-making process.
  • Equity Investment Group: Most of Vanguard’s global investments seek to track an index. Its global product lineup includes a number of funds designed to track indices that exclude companies that don’t meet social responsibility criteria specified by the index provider.
  • Portfolio Review: Vanguard’s Portfolio Review team engages with external investment managers periodically to review their practices and gain a better understanding of how ESG factors inform their investment processes.
  • Oversight and disclosure: The integration of ESG in Vanguard’s investment and engaged ownership practices is overseen by the Proxy Oversight Committee, which consists of the company’s CEO and select senior officers.
  • Ongoing review of policies and practices: Vanguard’s strategy is to continue to adapt and evolve its approach to responsible investment as it discovers new risks and issues affecting its investments.
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