Vanguard's New ESG Fund Offering

In another sign that sustainable investing is here to stay, Vanguard announced it would launch its first actively managed fund with a focus on environmental, social and (corporate) governance characteristics.

When it opens, in late May at the earliest, Vanguard Global ESG Select Stock will charge 0.55% in annual fees, half the average expense ratio of all ESG stock mutual funds.

Two managers from Wellington Management, Mark Mandel and Yolanda Courtines, plan to hold roughly 40 stocks. They’ll scout for profitable, smartly run companies in the U.S. and abroad that are also leaders in integrating ESG practices into their businesses.

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ESG qualities entail more than just being anti-gun or anti-tobacco. To earn the mantle, generally, companies must be mindful of their environmental impact; treat customers, suppliers and employees well; and be run by a diverse pool of managers who are aligned with shareholder interests.

Fund investors don’t have to sacrifice performance in support of their values. We looked at 28 large-company stock funds investing in U.S. and foreign firms, with ESG-focused strategies as defined by fund tracker Morningstar. On average, the funds’ annualized returns outpaced the MSCI All Country World Index in five of the past six calendar years between 2013 and 2018.

Vanguard isn’t new to ESG investing. The Valley Forge, Pa.–based firm already has three index-based ESG funds: Vanguard FTSE Social Index (symbol VFTAX), Vanguard ESG International Stock ETF (VSGX) and Vanguard ESG U.S. Stock ETF (ESGV).

The introduction of another offering, this one actively managed, shows that Vanguard is “going whole-hog into the ESG marketplace,” says Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter. Vanguard is following the money in a market that continues to grow. According to Morningstar, ESG funds and ETFs pulled in $5.5 billion in 2018, the third straight year of record net inflows (total money coming in, less money going out). Meanwhile, net flows into the U.S. fund universe overall hit a nine-year low.