Sustainable Investing: Vanguard’s new ‘impact fund’ targets social and environmental change, not just financial performance

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Vanguard released its sixth environmental, social and governance fund Monday, joining with U.K. investing firm Baillie Gifford to launch an actively managed, global equity fund that invests in companies the managers believe will produce a positive social change.

Vanguard Baillie Gifford Global Positive Impact Stock Fund will invest in companies the fund managers believe will generate financial returns as well as positive social and/or environmental impact. It will have the ticker VBPIX.

To launch the new Vanguard fund, adapted the existing Baillie Gifford Positive Change Equities Fund BPEKX, +2.27%, which debuted in 2017.

This will be Vanguard’s first dedicated impact fund – a type of the ESG investing — and only its second actively managed ESG fund.

Whereas some ESG funds exclude certain types of industries such as traditional energy or weapons manufacturers, or select firms based on certain historical or current metrics, impact funds are supposed to show a clear sense of purpose and provide measurable impact.

Some investors “want to try to do two things at once. They want to meet that preference to have an ESG-related product and also capture outperformance as well,” says Dan Reyes, head of portfolio review department at Vanguard. 

Funds may measure impact through a number of ways, such as dissecting a company’s disclosures, external data and analyst assessments, and the funds release reports that detail particular impacts, such as carbon emissions prevented, energy efficiency or other metrics.

OPINION: ‘Climate’ is the new buzzword in a crop of new ESG funds that were just launched

Vanguard has worked with Ballie Gifford since 2003, and the 118-year-old firm already manages $52 billion in assets for Vanguard. Reyes says the U.K. fund manager offers “deep expertise in the [impact] space.”

Baillie Gifford has four criteria for positive change: social inclusion and education, environment and resource needs, healthcare and the quality of life, and basic fundamental needs.

“They look for companies that are launching products or initiatives that have some sort of connection to those four elements of the framework. When they think about adding a company to the portfolio, it has to meet the criteria from both the financial perspective, that is, we expect this company to outperform from a purely financial perspective, and take a serious look at how strictly companies are making progress on these four criteria,” Reyes says.

The largest holdings in the new fund are Dutch animal feed firm ASML ASML, -1.48% ASML, -0.85%, chip maker Taiwan Semiconductor Manufacturing TSM, -1.67% 2330, +0.40% and Moderna MRNA, -3.18%, a biotech company that produced one of the COVID vaccines.

Vanguard Baillie Gifford Global Positive Impact Stock Fund’s largest holdings
Company Ticker Country Fund %
1 ASML Holding NV undefined Netherlands 8.5
2 Taiwan Semiconductor Manufacturing  TSM, -1.67% Taiwan 8.07
3 Moderna MRNA, -3.18% United States 5.68
4 Deere & Co DE, -1.35% United States 5.09
5 Oersted A/S ORSTED, +3.68% Denmark 4.61
6 DexCom DXCM, -0.25% United States 4.55
7 Mercadolibre MELI, -3.20% Brazil 4.35
8 Tesla Inc TSLA, +0.20% United States 4
9 Bank Rakyat Indonesia BBRI, -0.93% Indonesia 3.89
10 HDFC Bank HDB, +0.58% India 3.84
Source: Vanguard, Baillie Gifford

Vanguard’s current lineup includes four exclusionary-based index mutual funds or ETFs, including the $12.9 billion Vanguard FTSE Social Index Fund  VFTAX, -1.20%, the largest of the four by assets under management, and the actively managed Global ESG Select Fund VESGX, +0.82%, which invests in companies with leading ESG practices.

The Securities and Exchange Commissions is looking closer at ESG funds with plans to create guidelines to define the term and prevent greenwashing, which is making misleading statement about how a fund may use ESG principles. Already the SEC has proposed rules about ESG investing mandates.

Read: A dirty secret: Here’s why your ESG ETF likely owns stock in fossil-fuel companies

Reyes says funds such as the new Positive Change fund produce impact reports alongside traditional financial reports. Baillie Gifford already produces impact reports, include the most recent from 2020.

The Baillie Gifford management team and investment objectives remain the same. The team already engages in shareholder advocacy to assess material risks, Reyes says, along with stated impact goals.

Here’s the track record for the existing Baillie Gifford fund and how it compares to the MSCI ACWI Index ACWEF, -3.51%.

Baillie Gifford Global Positive Impact Stock Fund Investor Shares
YTD* 1 Year 3 Years
VBPIX -36.12% -38.20% 15.25%
MSCI ACWI Index -20.18% -15.75% 9.04%
Source: Vanguard. Annualized total returns as of June 30, 2022

ESG investing has come under some criticism this year as performance suffered during the bear market led by technology companies’ weakness and fossil-fuel company outperformance. Despite the losses, Reyes says inflows into Vanguard ESG funds through June 30 is $1.4 billion, part of the net $77.1 billion that was invested in all Vanguard funds in the first six months of the year.

In previous bear market, ESG investors were more likely to stick with their holdings than other investors because many of them held securities that lined up with their personal beliefs.

Reyes says Vanguard investors in general are also likely to stick to long-term thinking, which helps keep people in the market even in downturns.

“We get this unique intersection, I believe, of investors who have these (ESG) preferences, but also really think about the Vanguard investment philosophy of investing over the long term. So we’ve been pleased to see the persistence of flows, despite what might be a challenging backdrop,” he says.

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This article was originally published by Marketwatch.com. Read the original article here.

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