VANGUARD ESG ETFs FOR FINANCIAL ADVISORS ONLY. NOT FOR PUBLIC DISTRIBUTION.

Transcription

1 VANGUARD ESG ETFs FOR FINANCIAL ADVISORS ONLY. NOT FOR PUBLIC DISTRIBUTION.

2 Today more and more people are evaluating investments not only based on their financial goals but also based on their personal values and social conscience. As investor interest in environmental, social, and governance (ESG) issues continues to grow around the world, we re committed to helping you meet the needs of your clients. That s why we are expanding our existing ETF lineup with two ESG index ETFs: Vanguard ESG U.S. Stock ETF (ESGV) and Vanguard ESG International Stock ETF (VSGX).

3 Help your clients make an impact through socially responsible investment In a rapidly changing world, environmental, social, and governance concerns are becoming more important to investors. Some may wish to see their beliefs reflected in their investments. ESG-focused strategies are one way to accomplish this objective. The evaluation of companies based on these three categories is often an indicator of sustainable and responsible business practices: Environmental criteria indicate how a company performs as a steward of the natural environment. Social criteria examine how a company manages relationships with its employees, suppliers, clients, and communities. Governance criteria include a company s board and leadership, executive pay, financial and other controls, and shareholder rights. Percentage of millennials and women that consider social and environmental impact important to investment decisions 87 % 64 % of MILLENNIALS of WOMEN Source: U.S. Trust, Bank of America Private Wealth Management, U.S. Trust Insights on Wealth and Worth. New York, NY: Bank of America Corporation. (Based on a nationwide survey of 892 high-net-worth and ultra-high-net-worth adults across the United States.) Our two ESG ETFs can help your clients invest with purpose Vanguard ESG U.S. Stock ETF (ESGV) and Vanguard ESG International Stock ETF (VSGX) are among the lowest-cost, most diversified exclusionary-screened index products in the marketplace. ESGV and VSGX offer all-capitalization exposure in the U.S. and international equity markets, respectively, to investors who seek to align their investments with their values. Each ESG ETF seeks to track one of two broad-based FTSE Russell indexes, one representing U.S. equities and the other representing international (non-u.s.) equities. A broadly diversified approach to ESG investing ESGV seeks to track the performance of the FTSE US All Cap Choice Index, which is composed of large-, mid-, and small-cap stocks of companies that FTSE Russell screens for certain ESG criteria. Vanguard Equity Index Group uses a full-replication investment approach to allocate the ETF s assets, seeking to hold each security in approximately the same proportion as its weighting in the index. VSGX seeks to track the FTSE Global All Cap ex US Choice Index, which is composed of large-, mid-, and small-cap stocks of companies in developed and emerging markets outside the United States that FTSE Russell screens for certain ESG criteria. The Equity Index Group selects the ETF s investments using an optimization approach, seeking to hold a broadly diversified collection of securities that, in the aggregate, approximates the key characteristics of the index. The new ETFs cover more than 80% of the U.S. equity market capitalization and approximately 70% of the international equity market capitalization. And investors benefit from a benchmark provider that has had a dedicated Sustainable Investment Team since

4 FTSE exclusion criteria employed by ESGV and VSGX FTSE excludes companies based on their production of certain goods and services or based on their records of conduct. Here is a list of FTSE s exclusion criteria. Exclusionary issue Restriction Companies that: Diversity and conduct Anti-corruption Violate the UN Global Compact Principle opposing corruption in all its forms, including extortion and bribery. Diversity Don t meet at least two out of three diversity criteria: At least one woman on the board. Equal opportunity policies in place. Equal opportunity management systems in place. Environment Violate the UN Global Compact Principles on the environment. Human rights Violate the UN Global Compact Principles on human rights. Labor standards and health and safety Violate the UN Global Compact Principles on labor standards and health and safety in their operations or supply chains. Nonrenewable energy Fossil fuels Have revenues arising from the production of petroleum or coal mining, or proven reserves in oil, gas, or coal. Nuclear Own or operate nuclear power plants, or uranium mines, or supply essential goods or services to the nuclear power industry. Vice companies Adult entertainment Produce adult entertainment. Alcohol Produce alcoholic beverages. Gambling Participate in gambling-related business activities, including casinos, online gambling, and racetracks. Tobacco Produce tobacco products. Weapons Conventional Produce or manufacture conventional military weapons and firearms. Controversial Civilian firearms Produce or manufacture cluster munitions, land mines, chemical or biological weapons, or nuclear weapons. Produce firearms or ammunition for nonmilitary use. Suitable as core building blocks in your clients portfolios For your socially focused clients, we believe that our broadly diversified ESG ETFs are well suited as core equity holdings in a portfolio. This is because ESGV and VSGX are among the very few ESG ETFs to provide all-capitalization exposure to their markets, with thousands of stocks in each portfolio. These ESG ETFs are market proportional across cap ranges, sectors, and investment styles. Nonetheless, investors should be prepared for returns that may vary from those of the broad market, as the ESG ETFs exclude certain companies, resulting in overweights or underweights to some sectors, regions, and factors. 2

5 Vanguard ESG U.S. Stock ETF ESGV Estimated expense ratio 0.12% Benchmark FTSE US All Cap Choice Index Exchange Cboe BZX Exchange Inception date September 18, 2018 Benchmark rebalance frequency Quarterly Fund characteristics as of September 30, 2018 Number of stocks 1,254 Dividend yield Price/earnings ratio 21.4x Median market cap $72.3B % in top % Earnings per share growth rate 9.4% Sector diversification Technology 25.4% Financials 19.6 Health care 14.9 Consumer services 14.0 Industrials 10.3 Consumer goods 7.7 Basic materials 2.6 Telecommunications 2.3 Oil and gas 2.0 Utilities 1.2 Other 0.0 Size exposure Large-cap 70.4% Medium/large 4.3 Mid-cap 13.4 Medium/small 5.4 Small-cap 6.5 Percentages may not add up to 100% as a result of rounding. Source: Vanguard. The screening process FTSE US All Cap Index 1,860 COMPANIES $ 28T MARKET SCREENS FOR: Diversity and conduct issues Nonrenewable energy Weapons Vice companies FTSE US All Cap Choice Index 1,582 COMPANIES $ 23T MARKET 3

6 Vanguard ESG International Stock ETF VSGX Estimated expense ratio 0.15% Benchmark FTSE Global All Cap ex US Choice Index Exchange Cboe BZX Exchange Inception date September 18, 2018 Benchmark rebalance frequency Quarterly Fund characteristics as of September 30, 2018 Number of stocks 1,673 Dividend yield Price/earnings ratio 14.0x Median market cap $20.8B % in top % Earnings per share growth rate 11.8% Sector diversification Financials 31.2% Consumer goods 14.8 Industrials 11.5 Consumer services 9.9 Health care 9.6 Technology 8.8 Basic materials 6.3 Telecommunications 4.0 Utilities 2.1 Oil and gas 1.8 Other 0.0 Regional exposure Europe 42.6% Pacific 32.6 Emerging markets 16.8 North America 7.5 Middle East 0.5 Percentages may not add up to 100% as a result of rounding. Source: Vanguard. The screening process FTSE Global All Cap ex US Index 5,994 COMPANIES $ 25T MARKET SCREENS FOR: Diversity and conduct issues Nonrenewable energy Weapons Vice companies FTSE Global All Cap ex US Choice Index 4,560 COMPANIES $ 17T MARKET 4

7 5

8 Understanding an ESG-focused investment approach The adoption of ESG investing has accelerated as investors increasingly evaluate their investments with financial goals and personal values in mind. In today s changing world, global sustainability challenges such as flood risk and sea-level rise, privacy and data security, demographic shifts, and regulatory pressures are adding investment risk factors not seen previously. With companies facing rising complexity on a global scale, your clients may be reevaluating their traditional investment approaches, leading them to consider ESG investments. Clients may be concerned about making their investment dollars count. They may be wary about putting their support behind companies that they don t feel are making a strong enough effort to make the world a better place. By helping investors identify issues and concerns that are important to them and aligning their investments accordingly, you are giving your clients a voice. And this can go a long way in deepening existing client relationships and establishing new ones. This increasing interest in ESG-focused investments is also reflected in recent asset growth. Growth in ESG-focused assets has accelerated +73 % Global ESG assets under management (trillions) 2012 $ $ $22.9 $12,317 $17,322 $22,264 Strategy (billions) $5,935 $4,589 Portfolio screening ESG integration Active ownership Impact investing $156 $7,527 $5,919 $238 $10,369 $8,365 $579 Notes: The breakdown of assets by strategy includes double counting. For example, investment managers that engage in ESG integration and advocacy include total firm assets in both categories. The Global Sustainable Investment Alliance (GSIA) accounts for this by subtracting double-counted assets from the total one time, leaving a total headline estimate of $22.9 trillion. In order for an institution s assets under management to count in the active ownership, it must have sponsored or cosponsored at least one shareholder resolution for an ESG-related issue. The institution s assets are then included in this estimate. The portfolio screening category includes GSIA assets from positive screening, negative screening, and norms-based screening. The impact investing category includes GSIA assets from impact investing and sustainability-themed investing. Sources: Vanguard calculations, using data from GSIA. 6

9 Strategies for engaging in values-based investing ESG is an investment-related activity that accounts for some type of environmental, social, or governance consideration. This type of investing can be implemented in the following ways: ESG ESG integration Screening Impact investing ESG integration Investment stewardship Inclusion or exclusion from a portfolio of certain sectors or companies based on specific ESG criteria or minimum standards of practice (norms-based). Targeting specific social or environmental outcomes alongside financial returns, either through private or public investments. Systematic inclusion of financially material ESG information (risks and opportunities) to complement standard investment analysis by active managers. Using shareholder power to influence corporate behavior, including direct corporate engagement and proxy voting. Different screening approaches used in ESG investments Exclusionary screening excludes countries, sectors, or companies based on specific criteria that some consider undesirable ESG practices. An example is screening out tobacco companies. Screens may be based on whether companies manufacture or sell certain types of products and services (e.g., oil producers, gun manufacturers) or on thresholds established by the asset manager or index provider (e.g., companies deriving a certain percentage of revenue from alcohol sales). Inclusionary screening looks for investments in companies that have high ESG ratings relative to their peers or other investment opportunities. An example is including a company in the mining industry that is inherently risky from an environmental perspective but that ranks highly on managing the environmental impact of its products and services relative to competitors. Ratings are often provided by third-party companies such as MSCI, FTSE, and Sustainalytics. Benefits of an index approach to exclusionary screened ESG products: Lower cost versus most competing products active approach. Potentially broader exposure and diversification. Transparency and consistency of index rules versus active approach. More consistent differences in exposures relative to the market aid in understanding performance. 7

10 Key steps for evaluating an ESG investment decision 1 Define goals 2 Evaluate options 3 Decide on action 4 Reassess periodically Identify what set of ESG issues your client may want to address. Analyze different approaches to help meet a desired goal. Select from the range of potential options that meet a client s ESG criteria based on a rigorous evaluation of trade-offs. Monitor investment decisions to ensure that action or inaction still makes sense. Identify issues Environmental ESG ESG integration Structure recommendation Is this meeting my goals? Active ownership Social Portfolio screening Governance Impact investing Documentation Determine objectives Satisfy values preference Effect meaningful change Generate financial benefit Meet legal requirement If the answer is No, revisit Step 1 and redefine your goals. Vanguard s dedication to investment stewardship. As with all Vanguard equity funds, you and your clients will benefit from Vanguard s ongoing stewardship and mission to advocate for, and engage with, companies to employ governance practices that align with the long-term interests of our clients. 8

11 Help your clients make an impact! Get more details on Vanguard ESG ETFs by contacting your sales executive at or visit advisors.vanguard.com/esg

12 Vanguard Financial Advisor Services TM P.O. Box 2900 Valley Forge, PA Connect with Vanguard > For more information about Vanguard funds or Vanguard ETFs, visit advisors.vanguard.com or call to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing. Vanguard ETF Shares are not redeemable with the issuing fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling. Investors cannot invest directly in an index. All investing is subject to risk, including the possible loss of the money you invest. Investments in stocks issued by non-u.s. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets. Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks. Diversification does not ensure a profit or protect against a loss. London Stock Exchange Group companies include FTSE International Limited ( FTSE ), Frank Russell Company ( Russell ), MTS Next Limited ( MTS ), and FTSE TMX Global Debt Capital Markets Inc. ( FTSE TMX ). All rights reserved. FTSE, Russell, MTS, FTSE TMX and FTSE Russell and other service marks and trademarks related to the FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies and are used by FTSE, MTS, FTSE TMX and Russell under license. All information is provided for information purposes only. No responsibility or liability can be accepted by the London Stock Exchange Group companies nor its licensors for any errors or for any loss from use of this publication. Neither the London Stock Exchange Group companies nor any of its licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Indexes or the fitness or suitability of the Indexes for any particular purpose to which they might be put. Printed on recycled paper. FOR FINANCIAL ADVISORS ONLY. NOT FOR PUBLIC DISTRIBUTION The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. Patent Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623. FAESGBR