Today, I got an announcement from Vanguard that they’re introducing two new funds. Ever since I found out about the Vanguard Total Stock Market Index fund (VTSAX), I haven’t paid much attention to other funds. VTSAX is probably one of the more popular funds and for good reason. With an expense ratio of 0.04%, it’s arguably the cheapest index fund out there. Something about these new funds caught my eye though. The funds are only invested in companies that meet environmental, social, and governance criteria (ESG).

The names of the new funds are Vanguard ESG U.S. Stock ETF (ESGV) and Vanguard ESG International Stock ETF (VSGX). So, basically, they’re the same fund, but one is for the U.S. market and the other International. ETF stands for exchange-traded fund, and you can read more about them here if you want the nitty-gritty details.

Apparently, ESG funds have been around for a while, I just never heard of them. These new ESG funds are like the VTSAX in that they’re invested in multiple companies. The difference is that VTSAX invests in the entire market and the ESG funds only invest in companies that have higher standards, when it comes to the following criteria.

Environmental

Companies are evaluated on energy use, waste, pollution, natural resource conservation and animal treatment. They’re also evaluated on which environmental risks might affect a company’s income and how the company manages those risks.  An example of a company in violation of the ESG would be one that isn’t complying with the government’s environmental regulations.

So that’s pretty cool. I’m all for preserving the world we live in by taking care of the environment. I’m not an environmentalist fanatic, but I do hate waste and think solar/wind energy needs to replace fossil fuels. The world is too beautiful to let these companies continue to harm it.

Social

Companies are evaluated on their business relationships. The evaluation looks to see if the companies are working with suppliers that share the same values as the companies claim to hold. It also evaluates if the companies are donating a percentage of their profits to the community or performing volunteer work. Another thing it evaluates is if the companies are showing a high regard for the employee’s health and safety.

Governance

The governance evaluation looks to see if companies are engaging in illegal behavior or use political contributions to obtain favorable treatment. It also takes into consideration the companies’ accounting methods. Another thing they do is make sure the companies are avoiding conflicts of interest in their choice of board members.

All of the things mentioned in the ESG criteria make the funds sound great. Vanguard particularly states that the funds “exclude the stocks of companies that don’t meet certain criteria in connection with the production or manufacture of:

  • Adult entertainment
  • Alcohol and tobacco products
  • Conventional and controversial weapons
  • Fossil fuels such as natural gas, oil, and coal
  • Gambling activities
  • Nuclear power

The ETFs also steer clear of companies that don’t meet certain diversity criteria as well as the labor, human rights, anti-corruption and environmental standards defined by the ten principles of the U.N Global Compact.”

While this sounds good, the ESG evaluation is subjective. So you may still disagree with the values of some of the companies in the funds. You would have to go through each company in the funds and see what their values are to ensure you don’t invest in a company that holds values that are different from your own.

Because of the subjectivity of the ESG evaluation, I’m having a hard time deciding if I would rather invest in these funds over the VTSAX. VTSAX invests your money into the entire stock market so you get the good, the bad, and the ugly. I don’t like the fact that some of the money I invest into VTSAX goes to the adult entertainment industry. Vanguard didn’t say that the ESG funds are excluding all of the adult entertainment companies though. Just the ones that don’t meet their certain criteria in the production of it.

How much is the expense ratio?

The new funds aren’t the first of their kind that Vanguard has offered. The first ESG fund provided by Vanguard was the FTSE Social Index Fund (VFTSX). The expense ratio is 0.20% and the new funds are quite a bit cheaper.

The ESGV fund comes in at 0.12% and the VSGX fund is 0.15%. I guess Vanguard put out the VFTSX to test the waters and it’s been successful, so they decided to create two new funds at a cheaper rate. I don’t know the actual reason why they created these fund though so don’t hold me to that.

Because the cost of the two new funds are both over three times more expensive than the VTSAX, I’m going to have to pass on investing in them. If the funds were the same price as VTSAX then sure, I’d be in. But with the ESG evaluation being subjective, I don’t see a reason to switch. I’m sure I’d find a company in the ESG funds that had different values than I do. Those prices are still pretty good compared to other funds though so if you’re investing in something with higher fees, you might want to make the switch.

Conclusion

I think that these new funds are a sign that we’re moving in the right direction. I wasn’t aware that some of the companies I’m investing in with VTSAX might be violating some of the ESG standards. It seems to me like we need to do something that causes all companies to follow better practices.

What are your thoughts? Do you think it’s worth paying the higher fees to make sure you’re investing in companies that follow the ESG guidelines?

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