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What’s in a name?


News broke this week that one of Vanguard’s popular ESG or Environment, Social and Governance-focused strategies may not have been as true to label as one would expect. According to reports and the group’s website, the benchmark index tracked by the fund did not measure up to the name.

Holding 4,500 individual fixed income securities, the Ethically Conscious Bond Fund is advertised as being filtered for fossil fuels, nuclear power, alcohol, tobacco, gambling, weapons and adult entertainment. However, as part of Vanguard’s regular review of the underlying benchmark, they found that it was only the publicly listed companies included in the index that were being ‘screened’ not government-issued, or unlisted company bonds.

Commenting on the issue, a spokesman said, “Vanguard consistently reviews our funds and ETFs and the indexes they are managed against including the ongoing appropriateness of the benchmark methodologies used by our ethically conscious range to screen securities,”. Further confirming that “it was during this routine process it came to our attention that some company structures, including non-listed companies may not be excluded by the screens applied by the index provider”.

  • Given the majority of the fund’s assets are invested into government bonds and other large company bond issues, the investments that do not meet the screen are unlikely to be a material portion of the portfolio. That said, the announcement raises an important issue facing investors and advisers alike when seeking to invest more ethically or sustainably. On the one hand, passive investment strategies like Vanguard or iShares offer the cheapest version to access these markets, but on the other, you are limited to the quality of the benchmarks that they track.  

    With advisers at the coal face of client discussions, needing to navigate the difficult conversations around the ethical views of a diverse range of clients, access to quality information and transparent products has become more important than ever. What one person considers ethical may be completely different to the next, but at the very least, advisers need to be confident and understand the labelling of products made available to them. 

    A case in point is another sustainability index of the Australian sharemarket, which looks near identical to that of the ASX 200 index itself. In the example reviewed, the top 10 holdings were differentiated by one, if not two stocks, with both containing each of the three major mining companies, plus a gold miner in the sustainable option, and banks, one less for the sustainable option.

    If anything, this once again reiterates the nuance required in navigating the ethical, responsible, sustainable and ESG universe. Most strategies rely on external data to determine the appropriateness of their investments, whether in the form of consensus forecasts or revenue sources, so if the data isn’t well understood, nor is the product likely to be. 

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