Sunday, 16 May 2021

A Fossil-Free Option from Vanguard...At Last!


Vanguard are one of the world's largest fund managers with assets under management of $7 trillion, however they have been late to the ESG party. But better late than never I suppose, Vanguard UK have finally come around to offering funds which should be more acceptable to investors who prefer to avoid fossil fuel companies...something I have been pressing them to do for some time now.

The ESG Global All Cap (V3AM) is a passive index exchange traded fund (ETF) launched on the UK market in March 2021. The fund tracks the FTSE Global All Cap Choice Index which is basically the Global All Cap index which is then screened to exclude those companies which do not meet certain environmental, social or governance criteria (ESG). The index will therefore exclude:

1. Companies which do not meet standards on human rights, the environment and anti-corruption;

2. Non-renewable energy - basically companies involved in coal, oil and gas;

3. Vice products such as adult entertainment, alcohol, tobacco and gambling;

4. Weapons and landmines

Fund charges are 0.24% and platform charges to hold with Vanguard Investor are an additional 0.15%.

The fund has just under 5,000 holdings - large, medium and small from all around the globe. Unsurprisingly, US-listed companies account for 60% of the fund, Japan 7%, China 6% and the whole UK-listed shares less than Apple... just 3.2%.

Some top holdings include Apple (3.4%), Microsoft (3.1%), Amazon (2.4%), Google (2.3%), Facebook (1.3%), Tesla (0.9%) and JP Morgan Chase (0.8%).

Dividends will be paid quarterly.

I disposed of my Vanguard Lifestrategy funds in 2019 as I started to expand my green portfolio. In 2020 I added the iShares World SRI ETF as a partial replacement for the global equity element provided by the Lifestrategy funds. So I am pleased to see Vanguard introducing this climate-friendlier option for investors who are concerned about climate change and wish to avoid fossil fuel companies.

Having said that, ESG funds are a drop in the ocean compared to Vanguards massive traditional index funds. Current assets for this ETF fund are just $31m compared to $8bn for their All World ETF (VWRL). Vanguard therefore remain under fire from environmental organisations... they are the world's largest investor in the coal industry for example with holdings in over 200 coal operations worth a combined $86bn according to Reclaim Finance.

Last year CEO of Blackrock, Larry Fink said "Climate change has become a defining factor in companies' long-term prospects … But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance. In the near future — and sooner than most anticipate — there will be a significant reallocation of capital"

The large pension funds, local authorities and institutional investors are increasingly realising that they can no longer remain passive when it comes to addressing the existential threat of climate change. They demand the choice of avoiding fossil fuel companies and it looks like Vanguard have finally got the message.

I will consider adding this Vanguard fund to my list of future possibilities to sit alongside my iShares fund. Now we just need an ESG version of the Lifestrategy fund...I'm not holding my breath!

It will be interesting to see how these ESG funds attract investors money compared to the more traditional index funds. Would you consider exchanging your VWRL for V3AM?

8 comments:

  1. If we get a ESG Lifestrategy (which is the majority of my ISA holdings still) then I'm all in. Definitely will shift my VWRL holdings to V3AM pretty quickly.
    I'd still prefer to be more green energy focused like the iShares Global Clean Energy ETF. Most "ESG" definitions are so broad to effectively rule virtually everyone in. Apologies for posting anonymously as I work for one of the companies that you have a holding in and I don't want to be giving investment advice!

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  2. I agree that many ESG funds are creating confusion when they continue to hold fossil fuel companies. Fund managers have been merely re-branding existing funds and calling them "ESG" to jump on the green bandwagon.

    It's therefore welcome to see these fossil-free index funds coming to the market and if they prove to be popular with investors than I guess Vanguard will look at an ESG version of their Lifestrategy funds.

    I agree that more weighting to the likes of the Clean Energy ETF is preferred by some adventurous 'green-minded' investors...it currently accounts for around 10% of my green portfolio but is obviously more volatile as we have seen in recent months as the SP dropped over 35% from £14 in January to currently below £9.

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  3. I suspect the biggest problem with a 'Green' version of Life Strategy is the difficulty of finding a range of green bonds with attributes that mirror conventional ones.

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    1. Agreed it may take some time but if the equity element of a greener version of the Lifestrategy funds used the ESG fund, they could continue with a blend of conventional gilts and gradually introduce the green gilts. The chancellor has announced he will launch two new green gilts this year to raise a minimum of £15bn for tackling climate change and I suspect many governments throughout the developed world will be doing something similar so it should not be too long before there is a range of global green bonds.

      https://www.dmo.gov.uk/data/gilt-market/green-gilt-issuance/

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  4. Thanks for bringing this to my attention, diy - I shall be adding this fund to my portfolio when I get the chance.

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    1. Nice one weenie. I hope it does as well as your All World tracker...it will be interesting to compare over time.

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  5. V3AM is benchmarked to FTSE Global All Cap Choice Index and I guess we'll see its ESG scores from MSCI et al in a few months. But I reckon it is going to look "less ESG" than iShares MSCI World SRI SUSW/SGWS, which tracks MSCI WORLD SRI Select Reduced Fossil Fuel Index. But more ESG options are always welcome!

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    1. Rod, definitely the more esg funds and choice for investors the better. But yes, I prefer the iShares (SGWS) fund for my green portfolio.

      I had a brief look at the holdings for the Vanguard fund and see it holds the big banks which continue to bankroll the fossil fuel companies. So as mentioned in the article, JP Morgan 0.77% of the portfolio and also Bank of America 0.52% both feature in this recent Guardian article

      https://www.theguardian.com/environment/2021/mar/24/big-banks-trillion-dollar-finance-for-fossil-fuels-shocking-says-report

      So yes, as you say, Vanguard less 'ESG' than the iShares fund.

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