Register to hear from the exceptional talent behind Vanguard’s four new active ESG funds, as they look to share their views on sustainable investing with advisers at our virtual active insights morning on 12 May.
By Sarah Gibb-Cohen, senior investment product specialist, Vanguard Europe
At Vanguard, we have launched an actively managed global equity fund with sustainable investment criteria, representing our commitment to help investors balance their personal values with their financial goals.
The Vanguard Global Sustainable Equity Fund is invested almost exclusively in equities (at least 90% of the fund’s assets) and complements our newly launched range of actively managed multi-asset funds, the Vanguard SustainableLife Fund range, all of which meet sustainable investment criteria.
The combined offering enables UK investors to choose products based on their asset allocation needs and sustainability preferences.
On this basis, we designed the Vanguard Global Sustainable Equity Fund with five sustainability principles in mind: a commitment to underlying companies having a net-zero carbon footprint by 2040; the exclusion of companies that may have a negative impact on society and the environment; a commitment to engage with portfolio companies on ESG issues; the intention to have a carbon footprint1 for the fund’s portfolio that is at least 50% less than the benchmark2; and the requirement that companies follow good governance practices.
In this article we look at how the Wellington fund management team incorporates ESG considerations into its investment process, and its approach to company engagement in particular.
The Vanguard Global Sustainable Equity Fund offers a high-conviction portfolio of investments which meet certain sustainability criteria. This investment approach results in low turnover rates, long holding periods and high active share3.
The fund invests in the equities of companies globally, which generate high returns on capital relative to their peers, and whose management teams and boards display exemplary stewardship to sustain those returns over time.
Fund managers Yolanda Courtines and Mark Mandel define stewardship as how companies balance the pursuit of profit with the interests of all stakeholders (customers, employees, communities and the supply chain), as well as how companies incorporate material environmental, social and governance (ESG) risks and opportunities into their corporate strategy.
They believe that strong stewardship can help companies lower the cost of capital, become more durable and resilient and sustain returns on capital over time. ESG issues like product and worker safety, climate resilience, community relations, employee satisfaction, diversity and inclusion efforts, and executive compensation that is aligned with performance (to name a few) can often have just as much impact on a company’s long-term sustainability as traditional fundamentals.
Grounded in that philosophy, Mark and Yolanda aim to own established industry leaders that they consider worthy of their trust, with long track records of strong return on capital and demonstrably positive stewardship. Given their desire to balance fundamentals and ESG leadership, they avoid companies that they deem deficient or declining in either area.
They would not invest in a manufacturer that failed to prioritise safety or treated its line workers poorly, or an insurer that neglected to consider the impact of climate change on future claims.
Poor ESG practices like these can directly affect the bottom line, damage reputations and lead to expensive lawsuits. Good ESG practices, on the other hand, can potentially lead to stronger cultures, better capital management, and strategic clarity.
They can foster trust among customers and deepen employee loyalty, lowering turnover. Anticipating financial risks posed by ESG factors and integrating those factors into strategic planning can help bolster competitive positioning, which in turn enables companies to build upon and improve their ESG practices.
The goal of Mark and Yolanda’s stewardship activities — engaging with management teams on ESG issues and voting on the behalf of clients — is to support the decisions that they believe will maximise the long-term value of securities they hold.
They engage directly with company management teams to identify and understand ESG risks and opportunities. They also vote proxies in a manner that they believe should maximise the economic value of clients’ holdings.
By developing strong relationships with the companies they invest in, they champion and support long-termism. Their input to management teams can challenge insular thinking. They can also help prioritise governance factors that matter to longstanding owners and offer opinions on environmental and social issues on which companies may not have a perspective.
One example of company engagement is with Starbucks, the US-based coffee company and coffeehouse chain. Starbucks achieves margins well in excess of its cost of capital and has been disciplined in reinvesting in innovation and its brand, considered to be a key driver of the company’s value. Starbucks’ consumers identify with the company’s sustainable strategies such as ethical sourcing and water conservation and it has built a loyal employee base through superior benefits. The fund managers believe that Starbucks has an innovative approach to human capital in particular.
Ultimately, engagement enables Mark and Yolanda to hold boards and management teams accountable for their actions. They aim for transparency and authenticity in all of their engagements.
By partnering with Wellington, which has a long history of actively engaging with the companies it invests in, we believe that the Vanguard Global Sustainable Equity Fund can deliver long-term, sustainable value to investors.
1 Weighted average carbon intensity.
2 As referenced by the MSCI AC World Index.
3 Active share measures the active weight of a fund's portfolio (based on position weights) that differs from the benchmark weights.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Some funds invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall.
Investments in smaller companies may be more volatile than investments in well-established blue chip companies.
The fund may use derivatives in order to reduce risk or cost and/or generate extra income or growth. The use of derivatives could increase or reduce exposure to underlying assets and result in greater fluctuations of the Fund’s net asset value. A derivative is a financial contract whose value is based on the value of a financial asset (such as a share, bond, or currency) or a market index.
Some funds invest in securities which are denominated in different currencies. Movements in currency exchange rates can affect the return of investments.
For further information on risks please see the “Risk Factors” section of the prospectus on our website.
This document is directed at professional investors and should not be distributed to, or relied upon by retail investors.
This document is designed for use by, and is directed only at persons resident in the UK.
The information contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document is general in nature and does not constitute legal, tax, or investment advice. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of shares of, and the receipt of distribution from any investment.
The Authorised Corporate Director for Vanguard Investment Funds ICVC is Vanguard Investments UK, Limited. Vanguard Asset Management, Limited is a distributor of Vanguard Investment Funds ICVC.
For further information on the fund’s investment policy, please refer to the Key Investor Information Document (“KIIDs”). The KIIDs for these funds are available, alongside the prospectus via Vanguard’s website.
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