Our approach to ESG investing: Engage, allocate, and avoid

As a result, ESG considerations are integrated into our product and investment processes primarily through allocating capital to portfolio companies in our active funds, developing products that allow investors to avoid or mitigate exposure to certain ESG risks, and engaging with the portfolio companies in our index funds.

At Vanguard, we approach ESG through our:

• Investment product offer. 
• Integration of material ESG considerations throughout our investment processes. 
• Investment stewardship activities across our active and passive equity funds. 

Some investors simply don’t want exposure to certain ESG risks or want to avoid companies that don’t align with their values. In the United States, we currently offer four exclusionary (or negatively screened) index ESG products across equity and fixed income (plus several others in non-U.S. markets). Each product tracks an index that uses transparent exclusion measures to remove certain companies from the investment universe based upon predetermined ESG screening criteria.

The resulting products are diversified, market-capitalization-weighted, and low cost, enabling you to use them as portfolio building blocks.

• Vanguard ESG U.S. Stock ETF
  
• Vanguard ESG International Stock ETF
  
• Vanguard ESG U.S. Corporate Bond ETF
  
• Vanguard FTSE Social Index Fund Admiral™ Shares

Because ESG matters can affect an entity’s future revenues and liabilities, we expect managers of our active funds to incorporate material ESG factors into their security selection. Most of our managers consider these factors even for products without an explicit ESG investment strategy. The industry regularly refers to this approach as ESG integration, and it is used in both fixed income and equity investing.

We regularly assess how our external managers use ESG factors to inform their investment decisions and how their approaches evolve over time. We review how they gather ESG information, whether they employ dedicated analysts, and how they interact with those analysts. Our fund managers recognize that assessing material ESG risks is a competitive advantage for driving excess return. Our actively managed Vanguard Global ESG Select Stock Fund Admiral Shares (VESGX) employs an ESG integration strategy and invests only in companies that meet certain ESG criteria.

The Vanguard Investment Stewardship team continuously engages with the companies in which our index funds invest to better understand how they are addressing material ESG risks given that these risks may undermine returns over the long run.

Some firms respond to our stewardship activities, adopt best practices, and demonstrate clear and measurable progress toward risk reduction. Other companies are less proactive in mitigating material risks. But since an index fund must hold all, or a representative sample, of the companies in its benchmark index, when a portfolio company fails to address a material risk, we use investment stewardship activities, such as voting our funds’ proxies, to further encourage action to preserve shareholder value.

We believe that, if left unchecked, ESG risks can undermine a company's future long-term value. Additionally, we believe that, over time, well-governed companies that mitigate material risks will outperform those that are poorly governed. That said, there is no right style of ESG investing, and the landscape continues to develop rapidly. As such, we plan to continuously evaluate ESG opportunities for both index providers and active managers.