ESG investing

What is ESG? Clarifying the confusion A growing number of investors around the world are interested in different environmental, social, and governance (ESG) related issues. However, the dizzying array of acronyms and terminology in this area has produced investor confusion on what, if anything, to do. ESG investing is often used interchangeably with sustainable investing and socially responsible investing, but we define it as an investment-related decision that accounts for some type of environmental, social, or governance consideration. Ultimately, there are a wide range of approaches that an investor can consider. Below we describe four key product categories as well as two processes that investors, institutions or companies may engage in. While this overview is not exhaustive, it does provide a guide for the most commonly used terms. ESG landscape

Exclusionary (negative screening) The exclusion of certain sectors, countries, and securities from an investment universe based on specific ESG-related criteria.

Norms-based screening A form of exclusionary screen that sets minimum standards based on companies adherence to international norms.

Inclusionary (positive screening) Proactive investment in sectors or companies selected for higher ESG rating relative to industry peers or other opportunities.

Impact investing

Targeted investments with the dual objective of generating ESG-related impact in addition to some level of financial return. ESG integration Active investors who formally and systematically include financially material ESG information in their investment analysis. Advocacy The use of various resources (internal or external) to positively influence corporate behaviour on ESG-related issues, including through company or policy maker engagement, fundraising for and/or donating to charitable organisations with a mission to impact a specific cause, or even enouraging dialogue and peer action at a more local level.

ESG growth

ESG growth Investors respond to the rapidly changing world around them Investor demand Over $22 trillion1 in assets is now invested in environmental, social, and governance (ESG) strategies globally. This impressive figure confirms the sector has shifted out of its infancy and into the mainstream investment landscape. While the adoption of ESG by institutions has been the main driver of this growth, a broader set of investors are now wanting their investments not only to satisfy their financial objectives but also to express their values. Studies have revealed the ESG sector holds great appeal for two large and important demographics - millennials and women. Demographic shifts support ESG growth, particularly for millennials and women

Three quarter of Australian millennials say they prefer to invest in a responsible super fund than in a fund that only considers maximising financial returns.1

Women and Millenials are more open to increasing their ownership to sustainable investment products in their portfolio. Source: State Street Institutional Investor Survey 2016

Women are more likely to expect their super or other investments to be invested responsibly and ethically (57% of women surveyed compared to 42% of men). Corporate context Many companies now consider ESG matters to govern the sustainability of their business strategy, resources, and operational activities. With more than 11,000 public companies worldwide currently disclosing ESG indicators, the information available for investment managers and investors to use for decision-making has significantly increased. What makes ESG an enduring trend?

Environmental enablers Global regulatory change is driving increased adoption of ESG products by larger institutional investors. While transparency and standardisation of ESG data and reporting are also improving. ESG investing has become more defined with the emergence of several common definitions. This clarity can help investors choose the approach most aligned with their goals.

Investor preferences Investors are increasingly seeking social utility, or for their investments to align with their values, in addition to financial returns.

Investment rationale Recent studies show ESG having a neutral to positive impact on company performance and there are growing bodies of research that conclude ESG can achieve competitive rates of return.

Vanguard ESG

Social responsibility is part of everything we do Investors know what to expect from Vanguard: stability, experience and a focus on long-term, low-cost investing While Vanguard has been managing ESG investment products for almost 20 years, we've been advocating for investors and improved corporate governance in the market for over 40 years. Since our beginnings, Vanguard's long-term perspective and disciplined approach to investing has put our focus squarely on clients and the value of their investments. On behalf of all Vanguard funds and clients we actively engage in responsible business, investing, and governance practices in three ways: 1. Investment stewardship Our Investment Stewardship team is a governance leader among asset managers. The team works to ensure that the actions and operations of public companies create long-term value for fund shareholders.

We advocate for corporate governance best practices through our participation in industry organisations and forums

We engage with portfolio company executives and directors to share our corporate governance principles

We monitor how company boards oversee risk and strategy with a focus on matters that are of material importance to investors

We vote proxies at company shareholder meetings across each of our portfolios and around the globe 2. Corporate stewardship As a company, employer, and community member, we are focused on creating long-term value for all of our stakeholders through our disciplined business strategy and our sustainable operations.

Products We develop our investment products, services, and infrastructure to serve clients' interests

Workplace We invest in our workplace to attract, develop, and retain top-performing employees

Community We support our local communities around the world. 3. Investment Management Our funds We have been offering socially responsible products since 1999 to help investors reflect certain values while reaching their goals. In fact, Vanguard FTSE Social Index Fund is now the largest ESG-screened index fund in the United States Our ESG products reflect our customary disciplined process for developing new products while also offering Vanguard's hallmark enduring, low-cost, diversified, and long-term approach. Our investment practices Vanguard is a signatory to the United Nation's Principles for Responsible Investment (PRI). This encourages asset managers and other institutional investors to engage with corporations on ESG issues to create a more sustainable global financial system and support long-term investment value.

Practically, this means our teams integrate ESG into how they manage Vanguard's active global fund lineup.

Our active Fixed Income Group has a global ESG committee.

Our Quantitative Equity Group integrates ESG-related factors into their quantitative stock selection model.

Vanguard's Portfolio Review Department engages with our external active managers on responsible investing topics and their formal responsible investment policies.

Our approach to ESG

Committed to investor needs Across all of our products we embrace the same investing principles: clear goals, broad diversification, low costs and long-term discipline. We appreciate our clients have a wide variety of humanitarian, ethical, environmental, and social concerns, and many want to see these beliefs reflected in their investments. This demand from clients combined with our commitment to social responsibility means we've offered ESG screened products since 2000. Our ESG funds are designed to offer investors greater choice, while maintaining broad diversification at low-cost. Exclusionary screening Our approach to ESG investing is through exclusionary screening. Our ESG products track indices that use screens to exclude certain sectors, companies, or practices based on specific criteria that are considered negative environmental, social, and governance practices. For example screening out tobacco companies. While sector weightings of these funds may differ from a more traditional broad-market index, Vanguard's ESG funds remain highly diversified and aligned with our philosophy of providing enduring, low cost, diversified, and long-term products. Watch Tony Campos, Director of ESG Product Management, FTSE Russell discuss aligning values with investment objectives through the use of indexes (1:37)

Our ESG products