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Vanguard SRI European Stock Fund (UCITS) [note limited exclusions] (SICAV/Offshore*)

SRI Style: Negative Ethical
Fund Type: SICAV/Offshore*
Region: Europe
Asset Type: Equity
Launch Date: 24/10/2011

SRI / Ethical Overview

A 'limited avoidance' fund. 

The Vanguard SRI European Stock Fund employs a passive management or indexing investment strategy designed to achieve the performance of the index, by investing in all, or a representative sample of, index securities that satisfy the application of a screening process for socially responsible investing. The fund will not hold stocks of companies in the index that do not meet specific socially responsible criteria. The Investment Manager will hold each, or a representative sample, of those index securities meeting socially responsible criteria in approximate proportion to its weighting in the index, optimising the fund to match the risk factors and performance of the index.

SRI Policies (Primary strategy in bold)

  • Social policy Find fund options that consider social issues (e.g. human rights, labour standards, equal opportunities, child labour and adherence to internationally recognised codes such as the UN Global Compact). This will include funds in most of the different SRI Styles as this is considered a core issue. See fund information for detail.

SRI Features

  • Norms focus Find funds that use internationally agreed standards, conventions and 'norms' to help direct where the fund can and cannot invest (e.g. the UN Global Compact, UN Sustainable Development Goals). Read fund literature for further information.
  • Negative selection bias Find funds where their main 'ethical approach' is to avoid companies by using negative screening criteria. Read fund literature for further information.
  • Limited/few ethical exclusions* Funds with this label tend to avoid fewer companies than other ethical funds or other options with avoidance criteria. Strategies vary. The fund may only avoid companies in one or two areas (eg only exclude tobacco or armaments companies) or they may exclude only the very worst companies when measured against internationally accepted standards (across potentially a range of areas). Read fund literature for further information.

Corporate Activity

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SRI / Ethical Policy

Objective

The fund seeks to provide long-term growth of capital by seeking to achieve the performance of the index that measures the performance of large- and mid-sized common stocks of companies in developed countries.

Vanguard SRI Funds Investment Strategies

SRI Investment Philosophy

In tracking their target indices, Vanguard’s SRI funds will not hold stocks of companies in the indices that do not meet specific “socially responsible” criteria. The investment manager will hold each, or a representative sample, of those index securities meeting socially responsible criteria in approximate proportion to their weightings in the index, optimising the funds to match the risk factors and performance of the index.

Although the funds will refrain from holding stocks of companies contained in the indices but excluded by the SRI screening process, they will seek to perform consistently with the unscreened indices. To accomplish this objective, the funds use an optimiser to select securities. Each fund selects a representative sample of the securities meeting the SRI screening process that approximates the full index in terms of key risk factors and other characteristics. These factors include price/earnings ratio, industry weights, country weights, market capitalisation, dividend yield and other financial characteristics.

Each fund attempts to minimise deviations in currency, country and sector exposures relative to its index. However, it is possible that, if a large index constituent is excluded, there may be a lack of substitutes within the same country and sector, which would result in a potential mismatch of the fund’s weightings relative to the Index. Because the funds will not hold stocks of companies that do not meet socially responsible criteria, they may not track the performance of their target indices as closely as Vanguard’s other index funds.

Negative screen

Vanguard SRI funds use negative screening (exclusion) - in tracking their target indices Vanguard’s SRI funds will not hold stocks of companies in the indices that do not meet specific “socially responsible” criteria as outlined below.

There are five major areas that FTSE uses to exclude securities:

  • Human Rights – Failure to adhere to the Universal Declaration of Human Rights
  • Labour Standards – Violations of the International Labor Organisation’s Declaration on Fundamental Principles and Rights at Work
  • Environment – Violations of the Rio Declaration on Environment and Development
  • Anti-corruption Principles – Failure to adhere to the United Nationals Convention Against Corruption
  • Military Weapons – Production of landmines, cluster bombs, chemical and biological weapons, nuclear weapons

Negative screening produces a more diversified investment universe, making these funds suitable as a core holding in any portfolio. Best-in-class positive index inclusions tend to be less diversified, and thus suitable only as satellite investments.

The screening process is expected to remove 5-10% of the market capitalisation of each fund’s target index. The portfolio manager will use a sampling approach to security selection on the remaining 90-95% of the market capitalisation. Using sophisticated computer programs, the portfolio manager will select securities for the funds that approximate the fundamental and statistical risk factors of the unscreened index, such as country weights, market capitalisation profile, P/B ratio, and volatility.

SRI Engagement

Vanguard will follow its published proxy voting policy with respect to securities held in the SRI funds, and does not intend to take a more “socially responsible” or “activist” role in proxy voting with the SRI funds than it does with its other funds.

We believe that it is important for company officials to communicate regularly with shareholders regarding areas of interest or concern. In addition, shareholders should be provided with channels through which they may communicate with the board. While boards get shareholder "feedback" through the proxy voting process, a "yes/no" vote provides only limited insight into shareholder views.

We have found, through hundreds of meetings and discussions annually, that we can often accomplish more through dialogue than through the ballot. Please note that both proxy voting and engagement activities are focused on Governance, rather than Environmental or Social themes.

Third-party SRI screening agencies employed by FTSE conduct a rigorous analysis of all companies in each benchmark, assign SRI ratings to the companies and make regular re-assessments. Companies that fail to pass the screening are excluded from the universe of securities that are otherwise included in the index. The screening process is expected to remove 5% to 15% of the market capitalisation of each fund’s target benchmark.

Risk characteristics (In Line with the benchmark)

Although the funds will refrain from holding stocks of companies contained in the indices but excluded by the SRI screening process, they will seek to perform consistently with the unscreened indices, aiming to provide you as an investor with the same beta. To accomplish this objective we use an optimisation technique to invest in the securities that pass the SRI screens. Using sophisticated computer programs, we allocate the fund’s investments to securities in weightings that cause the portfolio to resemble the fundamental and statistical risk characteristics of the target index. These factors include price/earnings ratio, industry weights, country weights, market capitalisation, dividend yield and other financial characteristics of stocks.

Each fund will attempt to minimise deviations in currency, country and sector exposures as compared with that of its index. However, it is possible that, if a large index constituent is excluded, there may be a lack of substitutes within the same country and sector, which would result in a potential mismatch of the fund’s weighted holdings relative to the Index.

Stewardship Policy

Vanguard Asset Management, Limited and Vanguard Investments UK, Limited are committed to sound principles of corporate governance and efficient exercise of their governance responsibilities in the context of their activities as an investment manager. VAM acts as a discretionary investment manager for separately managed accounts(accounts) and for certain UK domiciled collective investment schemes and VIUK acts as authorised corporate director/manager (as appropriate) for such schemes (together the Funds).

The Vanguard Group, Inc. is the ultimate parent company of VIUK and VAM (together the UK Companies). The UK Companies place reliance on VGI to administer the proxy voting and stewardship requirements of the Funds and any relevant accounts as proxy voting agent (where clients have extended the ability to vote to Vanguard).

The UK Companies’ approach to stewardship reflects the above arrangements.

The UK Stewardship Code sets out seven principles (collectively, the Principles), which investment managers, such as the UK Companies, are required to comply with or explain why they do not do so. The Principles state that institutional investors should:

  • Publicly disclose their policy on how they will discharge their stewardship responsibilities
  • Have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed
  • Monitor their investee companies
  • Establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value
  • Be willing to act collectively with other investors where appropriate
  • Have a clear policy on voting and disclosure of voting activity
  • Report periodically on their stewardship and voting activities

The UK Companies’ Stewardship Policy is part of its broader corporate governance policy. The following overview summarises this policy and voting guidelines, and explains how the UK Companies’ Stewardship Policy addresses each Principle:

Principle 1: Publicly disclose their policy on how they will discharge their stewardship responsibilities.

The UK Companies’ and VGI’s duty to shareholders of the Funds is to maximise the long-term value of the investments held by our Funds. Vanguard advocates effective corporate governance by the companies in which Vanguard funds invest because Vanguard believes that it is an important way to enhance shareholder value.

The board of the Funds and of each of the UK Companies (the Board) has adopted proxy voting procedures and guidelines to govern proxy voting by each such Fund. The Board has delegated oversight of proxy voting to the Proxy Oversight Committee (the Committee), comprising senior officers of VGI. This Committee will report directly to the Board. The UK Companies are subject to these guidelines to the extent the guidelines call for VGI to administer the voting process and implement the resulting voting decisions, and for that purpose, have been approved by the Board of Directors of VGI.

The overarching objective in voting is simple: to support proposals and director nominees that maximise the value of a fund’s/an account’s investments – and those of fund shareholders – over the long term. While the goal is simple, the proposals that the Funds receive are varied and frequently complex. As such, the guidelines adopted by the Board provide a rigorous framework for assessing each proposal. Under the guidelines, each proposal must be evaluated on its merits, based on the particular facts and circumstances as presented.

For ease of reference, the procedures and guidelines often refer to all Funds. However, our policies and practices seek to ensure that proxy voting decisions are suitable for individual Funds. For most proxy proposals, particularly those involving corporate governance, the evaluation will result in the same position being taken across all of the Funds. In some cases, however, funds may vote differently, depending upon the nature and objective of each fund, the composition of its portfolio, and other factors. Accounts will be handled in a similar manner (subject to the specific terms as agreed).

The guidelines incorporate factors the Committee should consider in each voting decision because
many factors bear on each decision. A Fund/account may refrain from voting if that would be in the
Fund’s and its shareholders’/such account’s best interests.

These circumstances may arise, for example, when the expected cost of voting exceeds the expected benefits of voting, or when exercising the vote results in the imposition of trading or other
restrictions. 

In evaluating proxy proposals, VGI considers information from many sources, including but not limited to, the investment adviser, management or shareholders of a company presenting a proposal, and independent proxy research services. We will give substantial weight to the recommendations of the company’s board, absent guidelines or other specific facts that would
support a vote against management. In all cases, however, the ultimate decision rests with the
members of the Committee, who are accountable to each Fund’s Board or the Board of the UK
Companies (as appropriate) for accounts.

While serving as a framework, the voting guidelines cannot contemplate all possible proposals with which a Fund/account may be presented. In the absence of a specific guideline for a particular proposal (e.g., in the case of a transactional issue or contested proxy), the Committee will evaluate the issue and cast the Fund’s vote in a manner that, in the Committee’s view, will maximise the value of the investment, subject to the individual circumstances of the Fund/account.

Principle 2: Have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.

The UK Companies and VGI maintain a rigorous policy so that conflicts of interest in the proxy voting and corporate governance programme are addressed. The Board has delegated the day-to-day operations of the Funds’ proxy voting process to the VGI Proxy Voting Group, which the Committee oversees. While most votes will be determined, subject to the individual circumstances of each Fund, by reference to the guidelines as separately adopted by each of the Funds, there may be circumstances when the Proxy Voting Group will refer proxy issues to the Committee for
consideration.

Among the Proxy Voting Group’s functions is to determine and address potential or actual conflicts of interest that may be presented by a particular proxy and elevate such potential or actual conflicts to the Proxy Oversight Committee.

The Proxy Oversight Committee, whose members are senior officers of VGI, does not include anyone whose primary duties include external client relationship management or sales. This clear separation between the proxy voting and client relationship functions is intended to eliminate any potential conflict of interest in the proxy voting process.

In the unlikely event that a member of the Committee believes he or she might have a conflict of interest regarding a proxy vote, that member must recuse himself or herself from the committee meeting at which the matter is addressed and not participate in the voting decision.

Principle 3: Monitor their investee companies.

VGI engages with the boards and management of investee companies with the objective of maximising long-term shareholder value and the UK Companies will monitor this as part of their ongoing oversight of VGI’s investment activity.

As discussed by VGI in “Our views on corporate governance,” VGI believes that it is important for company officials to communicate regularly with shareholders regarding areas of interest or
concern. In addition, shareholders should be provided with channels through which they may
communicate with the board. While boards get shareholder “feedback” through the proxy voting
process, a “yes/no” vote provides only limited insight into shareholder views. We have found,
through hundreds of meetings and discussions annually, that we can often accomplish more through dialogue than through the ballot.

Principle 4: Establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value.

It has not been VGI’s practice to make a public statement in advance of the AGM or an EGM, submitting resolutions at shareholders’ meetings, or requisition an EGM as it is, generally speaking, beyond each Fund’s/ account’s investment mandate as a passive, index funds/accounts to engage in such activities. That said, VGI actively engages with boards and management on corporate governance matters appearing on AGM and EGM ballots.

Matters discussed include executive compensation, governance structures and practices, and
pending transactions and contests for board seats.

Principle 5: Be willing to act collectively with other investors where appropriate.

The UK Companies and VGI act by reference to the investment strategy of the Funds/accounts and their own investment management policies. The decisions taken within that strategy and those
policies may be the same as those taken by other institutional investors in one or more respects, but VGI has not collaborated with other institutional investors and VIUK/VAM would not require it to do so. The UK Companies and VGI are willing to listen to other investors’ positions on particular matters and regularly analyse and vote on shareholder proposals. Occasionally, shareholder proposals against management’s recommendations may be supported when the UK Companies and VGI believe such votes are in the Funds’/accounts’ best interests. Although this approach is driven principally by the investment strategy and the investment management policies, it also avoids the risks of acting in concert with other institutional investors.

Principle 6: Have a clear policy on voting and disclosure of voting activity.

VGI will provide the UK Companies (as appropriate) with the Fund’s (or the accounts, where appropriate) proxy voting records each August for the 12 months ended 30 June. The UK Companies will review this information and may ask for further details where it considers that to be
appropriate. For the policy on voting, please see the explanations provided above.

Principle 7: Report periodically on their stewardship and voting activities.

VIUK will report to the Board of each Fund annually with a summary provided by VGI of the Fund’s stewardship and voting activities for the 12 months ended 30 June. The board of each of the UK Companies will receive a summary provided by VGI of stewardship and voting activities for each account as appropriate, for the 12 months ended 30 June.

Resources, Affiliations & Corporate Strategies

SRI Screening

The index provider (FTSE) has developed a customised SRI screening process designed to analyse companies issuing securities in the index. FTSE has contracted with several independent third-party researchers to analyse and rate each company in the standard benchmark, based on the customised SRI screening criteria. Their independent research is overseen by FTSE’s Responsible Investing Unit.

FTSE based the screening process on internationally accepted principles of corporate responsibility, as laid out in the United Nations Global Compact (UNGC) and the Oslo convention on controversial weapons manufacturers. The UNGC is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with universally accepted principles in the areas of human rights, labour, the environment and anti-corruption.

There are five major areas that FTSE uses to exclude securities:

  • Human Rights – Failure to adhere to the Universal Declaration of Human Rights
  • Labour Standards – Violations of the International Labor Organisation’s Declaration on Fundamental Principles and Rights at Work
  • Environment – Violations of the Rio Declaration on Environment and Development
  • Anti-corruption Principles – Failure to adhere to the United Nationals Convention Against Corruption
  • Military Weapons – Production of landmines, cluster bombs, chemical and biological weapons, nuclear weapons

A quarterly comprehensive review of all index constituents is conducted to determine whether they
will be excluded from the funds’ holdings.

While Vanguard has selected FTSE, after evaluating its screening process and criteria, we will not be directly involved in decisions to exclude or include specific companies from the fund on the basis of social responsibility.

This strict segregation of duties avoids conflict of interest and ensures that investment implications will not drive in- or exclusion in any way. Given the investment policy of providing a return close to market return, the fund aims to be sector neutral despite certain excluded securities.

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