The Quiet Revolution

While there are a number of different approaches to sustainable investing which incorporate environmental, social and governance (ESG) considerations, like Vanguard, Wellington Management Company, who manage our Vanguard SustainableLife and Vanguard Global Sustainable Equity low-cost active funds, believes that engagement with companies can improve ESG practices and unlock value over time.

The collaboration of the research teams at Wellington allows the portfolio managers Nataliya Kofman and Loren Moran, who manage the Vanguard SustainableLife active funds, to gain a deeper, more holistic understanding of a security’s long-term value generation potential.

Through this multi-disciplinary approach, Nataliya and Loren are better equipped to assess material ESG considerations in tandem with traditional financial inputs, enabling more informed investment decisions.

Nataliya and Loren leverage the substantial internal research resources of Wellington. In addition to 51 industry-focused global analysts, 107 equity and fixed income research analysts and 19 macro strategists, Wellington’s Sustainable Investing team comprises 34 members across sustainability research and strategy, ESG sector research and climate research.

Given the numerous long-term relationships with corporate management teams and Wellington’s relatively long-term ownership of portfolio companies, they are often well positioned to engage with management to influence behaviour, where appropriate, for the benefit of clients.

For example, Isuzu, a Japanese truck manufacturer, is a high-quality franchise with industry leading powertrain technology and leading market share in Japan and Thailand. However, Wellington had believed that mis-aligned management incentives and insufficient board independence contributed to disappointing past returns.

Over years of holding the stock, Wellington engaged with management and the board on topics of independence and lower than expected returns. Given a lack of progress, Wellington wrote to the board in 2020, encouraging them to increase board independence, among other topics. Wellington also encouraged improvements in board diversity.

While the company made some progress since 2020, it was still lacking and Wellington engaged with the board again earlier this year to reiterate its stance on independence and diversity, among other topics. Its engagement efforts are beginning to yield results.

The portfolio managers also benefit from Wellington’s partnership with organisations at the forefront of sustainability and climate change research. Through its partnership with the Woodwell Climate Research Center and Massachusetts Institute of Technology (MIT), Nataliya and Loren have access to industry experts, from climate scientists to academics, which enables them to deepen their understanding of investment risks and opportunities related to both physical climate exposures and transition planning.

Wellington Management’s climate transition risk analysts also work closely with portfolio managers to enhance portfolio-level measurement, including carbon footprinting and scenario analysis, and to implement long-term climate objectives.

They also collaborate with sector analysts to research the risks and opportunities associated with transitioning to a low-carbon economy – policy, consumer behaviour and technological disruption, and litigation and disclosure requirements—and to translate research findings into actionable investment ideas.

Bridging the gap between science and finance

Overall, this level of collaboration in the investment process involves the continual assessment of a number of different inputs, blending ESG analysis with traditional fundamental analysis, to generate a holistic view of a company.

The portfolio managers follow their investment discipline dispassionately. On the equity side, Nataliya is often able to buy holdings in companies at a discount to the market because she believes that while the market is efficient at pricing in current macro trends and dominant fundamentals, the market is less efficient when faced with a wider range of outcomes.

Nataliya will often find these opportunities in more cyclical areas of the market, typically franchises with strong balance sheets and dividends which are sustainable. Dividend compounding and steady capital appreciation help drive the return for the equity sleeve in the Vanguard SustainableLife active range

On the fixed income side, Loren combines both top-down macro views, incorporating insights from Wellington’s macro strategists, to determine how much cyclicality and risk she would like in the portfolios with bottom-up security selection.

As active managers, by encouraging board diversity and independence, highlighting the potential to lower production costs by increasing water-use efficiency, or advocating for better health and safety practices, for example, they aim to influence positive change while helping to deliver long-term, sustainable value to investors.

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