This fund has relatively low exposure to ESG risk compared with its peers in the US Equity Large Cap Blend category, earning it the second highest Morningstar Sustainability Rating of 4 globes. ESG risk measures the degree to which material environmental, social, and governance issues, such as climate change, biodiversity, human capital, as well as bribery and corruption, could affect valuations. ESG risk differs from impact, which is about driving positive environmental and social outcomes for society’s benefit.
Based on its latest prospectus, sustainability or ESG factors are a focus in the investment process of Vanguard FTSE Social Index Fund. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. One key area of strength for Vanguard FTSE Social Index Fund is its low Morningstar Portfolio Carbon Risk Score of 4.11 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation. Thus, the companies held in the portfolio are in general alignment with the transition to a low-carbon economy.
Vanguard Ftse Social Index Fund shows 18.9% involvement in carbon solutions. This percentage surpasses the 12.8% average involvement of its peers in the Large Blend category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on. By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, thermal coal, and and small arms. The fund fulfills this goal as its investment exposure to each of these activities is negligible. The fund aims to avoid or minimize holdings in companies breaching international norms, including the UN Global Compact or the Universal Declaration of Human Rights.
The fund has relatively high exposure (11.19%) to companies with high or severe controversies. Controversies are incidents that have a negative impact on stakeholders or the environment, which create some degree of financial risk for the company. Examples of types of controversies include bribery and corruption scandals, workplace discrimination and environmental incidents. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. Such controversies can also damage the reputation of both companies themselves and their shareholders.
