Vanguard has launched a new way to approach sustainable investing. Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down the details with Vanguard Head of ETF Product Management, Rich Powers.
ALEXIS CHRISTOFOROUS: There's a new way for you to invest sustainably this morning. Vanguard just launched a new ESG, Environmental Social and Governance US corporate bond fund, its first ETF in the ESG fixed income market. And Rich Powers from Vanguard is here with us to talk about it. Good morning, Rich. So talk to us about why you launched this fund and what were you hearing from clients that made you do it?
RICH POWERS: Sure, thanks, Alexis. We're really excited about this portfolio. We've heard a lot directly from clients that we interact with, the individuals, financial advisors, institutions, that they were looking for more options for their clients to invest with their values, their preferences as it relates to environmental, social and governance issues.
We've built a series of portfolios out over the years to reflect that on the equity side of our business. We have four funds and ETFs that focus on ESG. And between them, they have about $12 billion in assets. But as you think about the portfolio construction and asset allocation, we didn't have an offering in the fixed income space. And so this was a kind of natural next step for us to build out our lineup.
BRIAN SOZZI: All right, Rich, I'm also interested too. This ETF will also exclude companies that don't meet certain diversity criteria. What are those requirements? And what are some examples of companies that just don't pass the muster on this?
RICH POWERS: There's a range of kind of filters in terms of companies that end up being excluded, Brian. So starting with the common filters with alcohol, tobacco, firearms, fossil fuels and nuclear power. And then there are a couple of other factors you alluded to, kind of the diversity criteria. Kind of the key kind of dynamic there is related to whether the diversity from a gender perspective is present on that company's board of directors. And do they have kind of a policy related to kind of diversity.
Those are kind of the key metrics. In terms of the companies as we're going to building out this portfolio, we'll be able to kind of filter, we'll be able to identify those companies over time. But given the kind of on day two of the product's launch, that information this kind of coming to us as the portfolios go out.
ALEXIS CHRISTOFOROUS: Conventional wisdom says that you have to, there's a trade-off, and you're just not going to get the returns that you would if you didn't go ESG. Is that mindset starting to change you think within Wall Street and among investors?
RICH POWERS: I think the academic evidence really on ESG, whether it's an alpha generating investment approach or if it's somehow kind of giving up return to take on this more focused investment approach, I think the evidence from an academic standpoint is inconclusive. There are strategies that have outperformed, those that have under-performed. It's very fund-specific whether or not the performance is additive in terms of approaching a product with an ESG lens or not.
For us, what we hear from clients is, they want to have broad market exposure in terms of their ESG investments, but they want to exclude certain companies. And time again, the survey work that we do, that we've seen elsewhere, says that there are common areas that they don't want exposure to, and that they're willing to take different performance in the market, whether it's good or better or worse, to reflect that in their investments.
BRIAN SOZZI: One area that I think would surprise some that would be excluded, are companies that pedal in GMOs. Does that mean snack companies, like PepsiCo, a ConAg, or even a Coca-Cola, just given how they use their crops, these value-oriented dividend stocks are left out here?
RICH POWERS: So it's mostly on the industrial side in terms of where the exclusions take place there. If you kind of step back and think about the exclusions that are actually in place and where the preponderance of corporate issuance happens today here in the US, again, this is a US product, the biggest place where we see a difference from the broad corporate market, is in the call it, electric generation and utility space. Where we're talking about 15 percentage points difference from a broad corporate market index that doesn't include ESG.
On the counter to that, what you end up seeing is in a product like this, there ends up being more exposure to the banking sector and in the technology sector, which given the screens that are in place, they end up showing clearly a little bit better.
ALEXIS CHRISTOFOROUS: What do you do with some of these companies that seem to be riding both sides of the fence? And it comes to mind for me, the big energy companies, like Exxon Mobil and Chevron. Many would say they would not fall under your category of ESG, yet they have components, divisions within them that are doing a great deal of work to help with climate change. So what do you do with a company like that?
RICH POWERS: Alexis, great point. Actually, it speaks to this broader kind of consideration around ESG not being this monolithic way to invest. There's different approaches to ESG investing. The means in which we're doing it in these ETFs, is that we're excluding certain sectors that represent common areas where investors focused on this don't want to have exposure. So energy, nuclear power, alcohol, tobacco.
There are other versions of ESG that others in the marketplace offer where they want to lean into companies that are potentially building that bridge to the future or exhibiting the best practices in terms of ESG. And so I think the key takeaway for investors would be, seeing the ESG name in the title of the product. You actually have to go a lot deeper. Because one product to the next, there's different methodologies that underlie what goes into that portfolio.
ALEXIS CHRISTOFOROUS: All right, Rich Powers from Vanguard. Thanks for being with us, and best of luck with the new bond fund.
RICH POWERS: Thanks, Alexis.