Ethical Investing: Here’s how Vanguard thinks you should choose an “ethical” investment?

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Last week Stockhead’s loyal readers heard from BetaShares on what a general ethical investing strategy might look like. But should you choose a specific “ethical investment”?

Read More: Ethical Investing: What does it actually look like? 

This week, Stockhead reached out to Vanguard for its hot tips. Like BetaShares, Vanguard operates an ethical (or sustainable) exchange traded fund (ETF) on the ASX. The Vanguard Ethically Conscious International Shares Index Fund and ETF (ASX:VESG) was launched last year. While VESG initially fell during last year’s downturn, it has recovered and now sits 5 per cent higher than when it listed.

Since 2016 it has offered the non-listed Vanguard International Shares Select Exclusions Index Fund.

But however easy it is to just exclude “unethical” industries – how can you judge an individual investment? We know that it is possible to judge, the Responsible Investment Association of Australia has a certification. How can you though?

Vanguard’s 4-step process

Vanguard provided Stockhead with its own framework for investors. In the guide, there is a four-step decision making process.

First investors have to decide what issue matters most to them. A firm that is environmentally friendly may be a laggard on gender equality. And just because the company itself may be ethical, does its suppliers abide by their standards? If not is its management fine with it or turning a blind eye?

Second, study ways to address a company’s goals, both ESG and financial, and third decide on an action. This may not just be buying or selling stock but potentially engaging in shareholder activism. Vanguard particularly implored fund managers and custodians saying they, “have a responsibility to advocate for change if it can help maximise long-term value”.

You’d expect the Australian Institute of Company Directors to be against anyone making life difficult for their members’ businesses. But their general manager of advocacy, Louise Petschler, told Stockhead last month shareholder expectations could not be ignored. “Clearly expectations of boards are rising and it is incumbent on directors to listen to diverse perspectives,” she said.

The final step is to reassess decisions periodically to determine whether or not a company’s goals are being met.

Screening

Of course, then comes the matter of picking the stocks themselves. Without giving their own recommended figures, Vanguard advised considering ESG metrics and from there choosing either an exclusionary or inclusionary approach.

An exclusionary approach involves eliminating the “worst” (while picking the least worst), while an inclusionary approach is about choosing only the best — the leaders. Stockhead recently spoke with BetaShares CEO Alex Vynokur, who called the former a “dark green approach to investing”.

But he said the success of his company’s ethical ETF was due to both his company’s and investors’ belief that, “near enough is not good enough”.

Vanguard’s ETF

Compared to Betashares’ ETF allocation, Vanguard has a far wider portfolio with over 1,600 stocks and a different composition.

BetaShares had two stocks in materials and a small portion of its shares in tech, but tech was Vanguard’s largest sector at nearly 20 per cent and there were over 100 materials stocks which did include a handful of metals stocks.

Here’s a list of all Vanguard’s Sustainable ETF holdings.

There are none solely listed in Australia, although there are a couple in New Zealand that are dual-listed including A2 Milk (ASX:A2M) and Auckland Airport (ASX:AKL). They have also invested in our NASDAQ-export Altissan.

If you look at Vanguard’s portfolio, some stocks may raise eyebrows such as Goldman Sachs, in the light of the 1MDB scandal. The bank is accused of bribery and fund misappropriation during a capital raise for Malaysia’s state-owned fund.

One also might question the ownership of American Airlines in light of its industrial disputes. However, among the airlines the Dallas-headquartered American Airlines has been one of the most improved in emission reduction pursuits.

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