Case Study - Vanguard Australian Shares ESG fund
Vanguard Australia has just launched an Australian Shares Environmental, Social and Governance (ESG) fund and exchange traded fund (ETF). Product strategy manager at Vanguard, Rachel White, spoke to Industry Moves about the process of narrowing down an index provider and how ESG is making it in the mainstream.
What goes into launching a new product?
At Vanguard we take a pretty thoughtful and disciplined approach to launching any new product. We Look at the broader macro trends - this [ESG] is a trend that Vanguard has been researching for many years - and we then go deeper into the specific client demand.
We then look at the investment characteristics of the product. In more simple terms is the product well diversified, will it withstand different market periods? And then finally we ask can we offer something that is differentiated from what is in the market.
Why do you think you are seeing more interest in ESG now?
There are a number of reasons. There are definitely key signals now that the market is becoming more conducive to ESG. There is more data available and better reporting available. We’re also seeing a convergence of some of the ESG terms and definitions.
There are more and more investors seeking this social utility, in addition to financial returns, from their investments.
Why did you decide to launch now?
The timing was right. We want to make sure that we’ve got through all the disciplined standard procedures. That process for us took about 9 months with this product launch.
We’ve seen positive momentum in the global [ESG] strategies. This was the logical next step for clients to build out a portfolio with an ESG overlay.
How did you research market opportunities?
Getting and speaking to individual investors to really understand their needs and preferences was a really critical part of our process.
We also commissioned research to ask a broader range of investors what their ESG preferences were.
What challenges did you face and how were they overcome?
With ESG there is a concern that values and ethical desires can be quite personal or individual and that ESG isn’t suited to a diversified product. But what we found was that there are are a subset of broad issues [that can be defined in a product].
What we’ve recognised with our ESG product range is that it’s not set and forget and issues that were once classified as niche can overtime become mainstream. A really good example of that is fossil fuels. Now it is probably the most important screen for the majority of investors.
We do perform a deep dive [regularly] to see if there are ESG issues that have moved into the mainstream.
How do you decide on an index provider?
One of our keys relationships when it comes to launching product is the index provider. We look to a third party provider, independent of Vanguard. And we look for benchmarks that are offered at a reasonable cost.
We selected FTSE Russell [for this product] they are actually a market leader in ESG and have been managing ESG indices for decades.
We have a list of a number of index providers that we work with globally. We want to make sure that we go through that due diligence process with every product.
Can you explain the fee structure?
It is pretty simple - a management expense ratio of 0.2 per cent for the fund and the ETF is 0.16 per cent and that is consistent with our range of index options.
We feel really comfortable that we are bringing in a low cost offer and that we are going to drive the cost down [in the market], making it comparable to investing in some non-ESG products.
Some of the feedback we got from investors is that they shouldn’t be paying a big premium for ESG.
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