Vanguard Ethically Conscious International Shares ETF (ASX: VESG) offers investors an attractive route to global equity markets with a focus on environmental, social, and governance (“ESG”) criteria, all for a remarkably low fee.

This strategy is increasingly favoured for its potential to outperform peers over the long term, reinforcing its position as a top choice for ESG-centric global equity investment. By mirroring the FTSE Developed ex Australia Choice Index, an ESG-tailored benchmark, it poses a significant challenge to active managers that are aiming to exceed its risk/reward profile.

The underlying index’s ESG approach is exclusionary, yet the portfolio is well-representative of the market-cap spectrum of the world large-blend equity Morningstar Category.
The ESG overlay results in dropping around 400 securities from the parent index, but pleasingly the portfolio still comprehensively captures the opportunity set available to active peers. The index's constituents are well-known and generally leaders in their respective industries, with a high degree of analyst coverage and a plethora of public information readily available.

As a result, information asymmetry (a factor that gives active managers some edge over the index) is lower here, making the passive approach more appealing. The portfolio is skewed toward the United States. However, since most of the holdings are multinationals earning a sizable part of their revenue from international markets, concentration is not a considerable risk here.

The underrepresented sectors in the Australian share market, such as IT and healthcare, are well represented in this strategy, with combined exposure standing at 47% as of December 2023. This makes the strategy a suitable diversifier for a local equity allocation. The risk/reward drivers of the portfolio largely resemble the broad-market index. So, for better or worse, the strategy should exhibit the key characteristics of the general global market performance, although occasional deviation in performance on account of the ESG overlay is expected. For instance, as technology names rallied last year, the ETF outperformed the MSCI World ex Australia Index category benchmark by 3.4%.

In conclusion, this exchange-traded fund is a top choice for ESG-focused global equities, offering low fees, broad diversification, and strong performance potential, making it an effective option for investors prioritizing ESG criteria.

ESG criteria

This fund seeks to provide broad ESG-focused global share market exposure in a passively managed, tax-efficient vehicle.

The index is arrived at by excluding companies that deal in business activities categorized into four buckets: nonrenewable energy, vice products, weapons, and controversies. Additionally, a screen is also applied to filter out names embroiled in severe controversies. We can see differences in the portfolio between the Vanguard MSCI Intl ETF (ASX: VGS) in the chart below. For more about the non-ESG ETF see this article. 

VESG vs VGS

Security weightings are in approximately the same proportion as the index's. The portfolio may also be exposed to securities that have been removed from or are expected to be included in the index. Such an approach has helped the strategy keep its annual tracking error low. So, while the passive approach means the strategy is unlikely to depart far from the index, it offers a low-cost, reliable way to get ESG-focused global share market exposure.

ESG considerations lead to some concentration, but this fund captures the broad market composition overall.

The strategy covers large- and mid-cap stocks from 24 developed markets, with the United States as the largest country allocation. The resulting portfolio effectively captures most of the opportunity set available to its actively managed competitors in the world large-blend category.

The ESG overlay skews the portfolio toward IT and healthcare stocks, but on balance, its sector composition is close to the average category manager.

Currency exposure

The unhedged nature of the strategy adds currency diversification to the portfolio as the Australian dollar has traditionally acted as a "risk" currency, rising during benign or buoyant conditions and coming under pressure when sentiment dips. This can reduce the volatility of global equity returns on an unhedged basis, compared with when foreign-currency exposure is hedged. 

Fee

The total cost ratio of the ETF is currently 0.18%. 

For more on ETFs read about a 3 ETF portfolio and a step by step process for choosing an ETF.

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