What is an ESG fund?
ESG stands for environmental, social and governance – factors considered in the investment process.
These funds can fit both your investment goals and your personal values.
Environmental
How a company manages its impact on the natural world. How climate change and regulation can impact a company's prospects.
Social
How a company or industry manages its relationships with employees, suppliers, clients and communities and how its business activities impact these groups.
Governance
Focusing on how a company is run. This can include its board and leadership, structure, executive pay, financial controls and shareholder rights.
Our ESG funds
We offer both index and active ESG funds, which include certain ESG criteria.
- Index funds seek to ‘track’ the overall performance of an index.
- Active funds try to provide capital growth with investments hand-picked by professional fund managers.
With ESG, there is no one-size-fits-all approach and it may not be suitable for everyone. Whatever approach to ESG fund investing you choose will be unique to you and will depend on several factors.
As with all investment decisions, these factors could include:
- your investment goals
- your investment timeframe (how long you have until you need the money)
- your attitude to risk (how you feel about the chance that returns will fluctuate or that you won’t meet your objectives)
- as well as your ESG preferences
Index
Our ESG index mutual funds and exchange-traded funds (ETFs) are for investors who want to avoid or reduce their exposure to certain ESG-related risks.
They track an index that screens out (or excludes) companies engaged or involved in certain business activities or controversial conduct, and/or derive their revenue (above a threshold) from that activity.
These can include companies involved in the manufacture or supply of fossil fuels, tobacco and controversial weapons, for example.
The indices our ESG index funds track are provided by FTSE Russell or Bloomberg. For more details of the indices, please see the fund prospectus.
Activities that are screened
Non-renewable energy
For example:
- nuclear power
- fossil fuels including oil, gas and thermal coal
Weapons
For example:
- nuclear weapons
- controversial weapons
- conventional weapons
Vice products
For example:
- adult entertainment
- alcohol
- gambling
- tobacco
- cannabis
Controversial conduct
For example, concerns with:
- corruption
- human rights
- labour
- environmental practices
Our index funds
Shares
Bonds
Active
We also offers active funds that seek to outperform the market while making investments based on certain ESG considerations.
The funds aim to provide an increase in the value of the investments over the long term (more than five years) by selecting companies based on specific ESG criteria, consistent with the fund’s objectives.
ActiveLife Climate Aware Funds
The fund manager of the ActiveLife Climate Aware funds incorporates ESG considerations in 4 main ways:
Net-zero commitment
The fund manager aims to invest a portion of the fund’s shares and corporate bonds in companies with net-zero science-based targets to reduce greenhouse-gas emissions.
Net-zero science-based targets are targets that provide a way for companies to reduce their greenhouse-gas emissions. They are considered to be ‘science-based’ if they are in line with what scientists deem is necessary to meet the goals of the Paris Agreement. This is an international treaty to limit global warming to well below 2 degrees C above pre-industrial levels and to pursue efforts to limit global warming to 1.5 degrees C above pre-industrial levels. The fund managers aim to invest 50% of the fund’s shares and corporate bonds in companies with these targets by 2027, rising to 60% by 2030, 90% by 2040 and 100% by 2050.
Climate considerations
The fund manager looks to invest a proportion of the fund's shares and corporate bonds in companies which display qualities that support their journey towards net zero.
A corporate bond is a type of loan that is issued by a company and sold to investors. In return, the company promises to pay the bondholder a specified amount of interest during the life of the bond and to repay the face value of the bond at maturity.
Exclusions policy
The fund manager excludes companies involved in and/or deriving revenue from tobacco, thermal coal, oil sands and nuclear / controversial weapons.
Revenue above certain thresholds, as determined by the external fund manager of the fund and set out in the fund manager’s exclusions policy.
Engagement with companies
The fund manager will engage with certain companies to encourage improvements in their paths to net zero by 2050. Engagement activities might include meeting with company boards, engagement with non-executive directors and participating in stakeholder dialogues.
Our active funds
Our principles
Think about your goals
Having a goal in mind can help when it comes to picking the right investments.
Knowing what you are investing for can keep you focused on building a portfolio that's right for your needs.
Stay balanced
Investing in the right mix of shares and bonds could have a bigger impact on returns than anything else you do.
It's all about finding the right level of risk and rewards for you.
Keep costs low
Investing is, by its nature, unpredictable. While you can't control the markets, you can control your investment costs.
Every pound you pay in costs and charges comes directly out of your potential returns. By keeping your costs low, you keep more of your returns.
Be disciplined
Sometimes our emotions can lead us to make simple mistakes when investing, like buying the latest hot investment when prices are high and panic-selling when prices drop.
The most successful investors stay for the long term and don't tinker wuth their portfolios too much.
What you should know before you invest
The value of investments can fall and rise so you might not get back what you invested.
Everyone is different. Make sure a fund’s objective fits your investment goals and personal values.
The companies included and not included in an ESG fund can differ between funds and change over time. For example, if a company is excluded from a fund for poor business practices, it may be included again when the issues are resolved.
The UK Financial Conduct Authority (FCA) introduced sustainability labels to help reduce greenwashing – exaggerated, misleading or unsubstantiated claims about ESG credentials – and make it easier for investors to find sustainable funds that meet their needs. UK-domiciled funds that use one of four approaches will use a sustainability label.
Funds can apply for sustainability labels as long as they meet certain standards. There are different labels available depending on the aims of a fund:
- Sustainability Focus
- Sustainability Improvers
- Sustainability Impact
- Sustainability Mixed Goals
You can learn more about sustainability labels on the Financial Conduct Authority's website.
Vanguard does not apply sustainability labels to its UK-domiciled funds, and its Irish-domiciled funds are not within the FCA’s sustainability labels regime so do not use sustainability labels either. Despite this, the funds referenced in this brochure are still ESG funds. The distinction is that, while they may not carry the specific sustainability label, they still consider ESG characteristics as part of their investment process.
You can approach ESG investing in different ways and the approach that you choose should align with your investment and ESG preferences.
The investment strategies of unlabelled funds can still maintain ESG characteristics as part of the broader investment process, without having an explicit sustainability objective.
A labelled fund is appropriate for investors who have certain sustainability requirements. They will be looking for their fund to have a specific sustainability goal.
UK funds with sustainability characteristics are required to publish a consumer facing disclosure which gives details of how it implements ESG principles.
You can find each fund’s Consumer Facing Disclosure on the fund’s details page.
Every fund has a prospectus and Key Investor Information Document. These documents give you useful information like the fund’s objective and how the fund is managed.
It’s important that you read these before investing as they tell you a lot about the fund’s approach to ESG so you can understand if it fits with your values.
You can find these documents on the fund’s details page.