Vanguard has debuted its first ETFs to incorporate environmental, social, and governance (ESG) screening into their security selection process.
The new funds from Vanguard are among the lowest in their respective categories of ESG ETFs.
The Vanguard ESG US Stock ETF (ESGV US) and Vanguard ESG International Stock ETF (VSGX US) provide broad market exposure to equities listed in the US and internationally respectively while excluding companies that fall short on certain ESG criteria.
The ETFs, which have been listed on Cboe BZX in the US, track market cap-weighted indices provided by FTSE Russell. They comprise large-, mid-, and small-cap stocks.
The indices’ underlying methodology utilises an initial screen to exclude the usual suspects, namely those operating in the adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power industries.
The process also strips out stocks of companies that do not meet certain diversity criteria as well as labour, human rights, anti-corruption and environmental standards as defined by the UN global compact principles.
The US fund tracks the FTSE US All Cap Choice Index, while the international fund tracks the FTSE Global All Cap ex US Choice Index, covering both developed and emerging markets.
The funds bear all the hallmarks of Vanguard’s low-cost approach with expense ratios of just 0.12% and 0.15% for ESGV and VSGX respectively. Indeed, ESGV becomes the cheapest means for ETF investors in the US to obtain domestic ESG-screened exposure, undercutting the iShares MSCI USA ESG Optimized ETF (ESGU US) by three basis points. The iShares fund houses some $100 million in assets under management.
Meanwhile, VSGX is a trailblazer, becoming the first sustainability-screened international ETF listed in the US to target both developed and emerging markets.
“Vanguard’s new ETFs can serve as core components of a portfolio for individuals, institutions, and advisors who wish to invest in broadly-diversified, low-cost ETFs screened for certain ESG criteria,” commented Matthew Brancato, Head of Vanguard’s Portfolio Review Group. “At the same time, investors should recognize that funds with ESG screens may perform differently than the broad market due to the exclusion of stocks of certain companies.”
Referencing the index methodology, Tony Campos, FTSE Russell’s Director of ESG Product Management added, “The focus on standardized definitions and consistent ESG criteria allows us to adhere to a rules-based index methodology. Our team of over 60 analysts leverages and analyzes company-level data in documents like annual reports, sustainability reports, and corporate websites to identify and structurally screen out securities to create the FTSE US All Cap Choice Index and the FTSE Global All Cap ex US Choice Index.”
Vanguard filed for the two new funds back in June. Speaking then, Jon Cleborne, head of Vanguard’s Portfolio Review Group said, “The adoption of ESG investing has accelerated in recent years, and more investors are looking for opportunities to align their investment choices with their values. Our new ETFs marry Vanguard’s characteristic low-cost, diversified investment approach with a rigorous ESG screening process.”