Vanguard index funds and ethical investing are two of the biggest investing trends in Ireland today. So what happens if you put both of them together? Here’s our review of Vanguard’s SRI (socially responsible investment) or ethical fund offering for Irish investors.

Read on to find how you can construct an ethical portfolio for your savings or pension using Vanguard funds, what it will cost, and how it has performed over recent years.

Interested in investing your pension or savings in an ESG-rated fund?  Visit our ethical funds centre to find out more.

First, the fund

We’ve focused on Vanguard’s SRI global stock fund.

The SRI global stock fund holds shares in over 1,800 companies around the world, and aims to track the performance of the share prices of large- and mid-sized companies in the developed world.

At first look, it holds similar investments to any world index fund, whether it applies ethical screens or not. Among its top ten investments, for example, you’ll find Apple, Microsoft, Berkshire Hathaway, and Procter and Gamble.

About 60% of the fund is invested in US companies, although there is a separate European-focused SRI fund if you prefer to keep your money closer to home. It holds bigger positions in European giants like SAP, Unilever, and GlaxoSmithKline.

Vanguard’s approach to ethical investing

Now, Vanguard is better known for index-hugging than tree-hugging. So what makes these funds ethical?

For their SRI funds, Vanguard apply seven filters to remove potential investments that do not meet their socially responsible criteria.

The first four filters are those set out in the UN Global Compact. This is a UN-led approach to setting ethical standards for investment.  The standards concern human rights, labour standards, the environment, and corruption.

On top of that, Vanguard add a weapons screen specifically removing companies involved in the production of land mines, cluster bombs and nuclear weapons.

It’s true that these ethical criteria will set the bar too low for some investors in search of an ESG pension or investment. But it certainly excludes the worst offenders, and offers a structured approach.

What’s more, Vanguard still measure the performance of the fund in relation to the wider index (that is, the unscreened index). So how do the funds perform?

Performance of Vanguard’s SRI funds

We’ve taken the Vanguard SRI global stock fund, and compared it to the Vanguard non-SRI global stock fund, as well as the index both funds track, over the three- and a five-year period to 31 January 2020 (the SRI fund is only in existence since 2014).

The result? As you can see in the charts, it’s a close call, but the the SRI fund has performed slightly worse over 3 years, with average growth of 10.1%, compared to 10.3% for the non-SRI Vanguard fund.

 

Over 5 years, the figures are 8.9% vs 9.2% – a slightly larger gap, but probably one that most investors who want a fund that takes account of environmental, social and governance criteria would be willing to accept.

It also suggests that in more recent years, the SRI fund has improved its ability to replicate the returns of a non-SRI screened fund.

 

On any analysis, these are respectable returns.

Note: the charts show the average annualised return after fund management costs.

What are the costs to an Ireland-based investor?

Many potential investors in Ireland who consider an ESG portfolio for their pension or investments are concerned that they will face high costs.

In fact, Vanguard – always a price leader in the investment industry – shows that it’s perfectly possible to invest ethically without a huge increase in costs.

The difference between Vanguard’s SRI fund and the non-SRI lookalike? 0.04%!

This means that for most customers, the all-in cost of advice, trading and fund management to access Vanguard’s SRI range with Moneycube, whether in a pension or an investment account, is 1.12%. (You can read about the costs of investing in Vanguard funds using Moneycube in detail here).

In many ways, Vanguard’s ESG fund offering offers the best of both worlds – the great value, index-tracking approach that has made them famous, coupled with a structured approach to screening out investments that fail to meet recognised socially responsible investment criteria.

For the investor or pension saver in Ireland who is looking to put their money in ethical funds, it’s a very serious option.

Interested in investing your pension or savings in an ESG-rated fund?  Visit our ethical funds centre to find out more.

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