Sustainable, Responsible &/or ESG Policy:

Please refer to the answer provided in the “Overview” section

Process:

The investment approach for our equity SRI fund is based on the below exclusion process:

• FTSE - provides the benchmark and identifies the securities for exclusion.
• Vanguard - given the excluded securities, optimises the fund to track the broad market.
• Investor - gains broad market exposure with SRI exclusions.

The Vanguard SRI European Stock Fund seeks to provide long-term capital growth by seeking to achieve the performance of the FTSE Developed Europe Index, which is comprised of large and mid-sized company stocks in developed markets in Europe.

The fund attempts to:

• Match the risk factor exposures of the index by investing in a representative sample of the securities that make up the index, excluding any securities which do not meet socially responsible investing criteria. The criteria take into consideration environmental, social and ethical factors as determined by the index provider and exclude stocks that violate UNGC principles and stocks of companies involved in making controversial weapons and tobacco products.
• Remain fully invested except in extraordinary market, political or similar conditions. The SRI screening process, which excludes index constituents that are or have engaged in activities that result in serious violations of the UNGC, is consistent with the characteristics promoted by the fund. For further information on the fund’s objectives, please refer to our website.

EIG’s process initiates after the nightly batch cycles complete, which includes portfolio risk monitoring (post-trade compliance).

Start-of-day controls

The following controls are performed by our portfolio managers:

• Investment tolerances: Start of day and end of day review of several investment tolerances including tracking error and liquidity, as well as sector and issuer active weights.
• Cash flow projection: Daily review of the portfolio’s net cash flow (e.g. client subscriptions and redemptions as well as dividends).
• Index activity: Regular review of index provider updates, including information about corporate actions and rebalancing. Portfolio managers also provide additional oversight of the controls that are performed periodically by Global Investment Data Management (GIDM), which ensure that index data in our portfolio management system matches that of the provider’s published index.
• Guidelines: Daily review of start of day and end of day deviation metrics, which compare portfolio positions (by security) with index weights to ensure portfolios remain in line with their respective index; only very small deviations may be permitted, to ensure minimal tracking error.

Portfolio review and construction

Vanguard’s portfolio managers begin their day reviewing the abovementioned metrics to confirm start-of-day positions are in line. Portfolios must be adjusted for cash impacts related to index changes and corporate actions. Intraday cash flows are systematically fed into our proprietary portfolio management tool and cash is invested in line with the benchmark using a combination of equities, futures or a combination of both. Finally, the portfolio managers must rebalance each fund on a quarterly basis due to index rebalances.

EIG uses a third-party optimisation tool, Axioma, to support portfolio construction for optimised strategies. Characteristics and fundamental factors, such as industry, currency, country, size, price-to-earnings ratio, yield, debt-to-assets ratio and beta are considered in the optimisation process. Trade list generation and fund cash flows are managed using these tools.

Buy and sell discipline

For Vanguard’s passively managed index funds, our buy and sell discipline is applied with the objective of maintaining portfolio holdings that match the risk characteristics of the benchmark as closely as possible, thereby minimising tracking error. Portfolio managers are responsible for security selection and portfolio construction, working as part of a team and basing their decisions on comprehensive buy/sell decision rules.

Fund investment decisions are a function of a daily analysis of cash flow (e.g. subscriptions, redemptions and dividends), corporate actions and index changes. Additionally, portfolio managers review daily reconciliation and deviation reports (which compare each portfolio’s positions to its index), as well as each fund’s risk/return profile. When required, securities are traded using proprietary software to bring portfolios back into line. Vanguard has several layers of monitoring and uses risk controls to ensure portfolios track their indices appropriately.

Our investment framework was created to minimise costs, risks and tracking error and to take into consideration future events. Vanguard’s portfolio managers work within set policies and guidelines; any deviation must be justified and have clear rationale. Our Investment Risk Management group evaluates performance and risk characteristics of all portfolios and works closely with the portfolio managers to help ensure that risks are understood and are managed in accordance with established guidelines. PRD works in conjunction with each fund’s board of directors to monitor portfolios, ensuring portfolios adhere to defined objectives. The team reviews performance regularly – generally on a weekly, monthly and quarterly schedule.

Derivatives usage

Vanguard does not use derivatives for leverage or speculation. We use derivatives only in circumstances where they offer the most cost-effective means of improving a portfolio’s risk profile. We always compare the cost of the derivative to the cost of constructing an equivalent position in traditional securities. We take a conservative approach to the use of derivatives and operate with closely monitored internal maximum limits.

We use a number of systems to manage derivatives. Software applications from third parties and those developed on a proprietary basis are used for trade execution and position management. Also, derivative positions are incorporated into portfolio management systems that manage a fund's positions as a whole in both derivatives and conventional securities. Our fund accounting department monitors daily contracts and margins.

A team process guides the trading and monitoring of our derivatives positions. Many eyes are focused on derivatives exposures to ensure that the portfolios’ positions remain within the agreed-upon tolerance levels, including the following:

• Index portfolio managers
• Index traders
• Dedicated derivatives traders
• Risk Management Group

For our equity index portfolios, we typically use futures contracts, which allow us to remain 100% invested while freeing up cash for efficient portfolio management purposes (e.g. rebalancing, transitions). A good example is the reinvestment of dividends paid to the fund. Using futures contracts allows dividend receivables to be invested until the dividend payment date; this enables the funds to apply the index methodology consistently, limiting tracking error. Depending on the portfolio, we currently use different contracts, which we trade on a recognised exchange, for example S&P 500, FTSE 100 and Topix among others.

For our fixed income portfolios, futures, options, swaptions, caps, forwards, interest rate swaps and credit default swaps may be used for duration, yield curve, credit risk, volatility and FX management. We have expertise in their application and risk management.

We collateralise derivative positions at/or exceeding 100%, subject to the minimum transfer amount. Appropriate collateral instruments include government, corporate and asset-backed securities. The required amount of overcollateralisation increases for non-Treasury securities. Vanguard’s fund accounting department maintains the collateral, with market prices used to value the securities.

Index selection

When Vanguard assesses which index to track, we look at our best practices for index construction. Without liquidity, or the ability to be replicated, an index would fail to be trackable and would fail to meet our requirements and our investors’ needs.

We rigorously monitor our portfolios by evaluating our fund holdings, our turnover versus the assets we hold and by looking at liquidity thresholds. We stress test our portfolios regularly and these simulations allow us to understand whether we would be affected by situations such as those that arose in 2008 (Lehman's collapse), 1994 (when US rates rose aggressively) and 1987 (when the stock market crashed). There have been no negative findings from these stress tests to date and we will continue this rigorous approach to testing.

It is important to note that liquidity will always vary across time and market and we try to avoid trading during illiquid times. We follow broad based, diversified benchmarks that exclude some of the most illiquid securities.

Rebalancing considerations

Through the variety of indices that Vanguard portfolios track and our longstanding experience with equity index providers (e.g. CRSP FTSE, MSCI, S&P, Russell and Wilshire), we have acquired expertise in managing index changes in various equity market segments (global, large-cap, mid-cap and small-cap securities) and market conditions. Constituents of an index and their relative weightings can change over time. When these changes occur, we will review and take action as appropriate for each portfolio on a case by case basis.

We pay very close attention to these changes and how they affect individual security price movement. We have implemented robust procedures to monitor announcements made by the index providers regarding index changes.

The index portfolio management team analyses index changes. Our portfolio managers are also traders, allowing for effective implementation of any changes. Based on our analysis of the potential market impact cost vs. tracking risk of every index change, Vanguard may decide it is more prudent to execute some trades at prices other than the closing price of the index change.

The execution of trading strategies to implement index changes is dependent on the type of change that is taking place. While the bulk of trades are typically conducted at the market close, we recognise these trades can be “costly” and that many clients can tolerate a limited amount of tracking error in order to reduce execution costs. Vanguard regularly executes alternative trading strategies designed to balance clients’ objectives of minimising both potential tracking error and trade execution costs.

Vanguard equity index portfolios are managed using a daily process. Each portfolio is monitored and rebalanced (if needed) every business day to ensure close tracking to its benchmark index. We typically use index futures contracts to reinvest dividend income or reclaimed tax (if appropriate) in our equity index portfolios. Using index futures contracts works particularly well in this scenario, allowing dividend receivables to be invested until the dividend payment date so that the fund follows the index methodology, limiting tracking error.

Resources, Affiliations & Corporate Strategies:

Vanguard does not have one centralised team responsible for ESG investment . Instead, we have various teams and groups addressing the different aspects of ESG. Please see details below on some of the teams that are responsible for various ESG considerations at Vanguard.

ESG Team, Portfolio Review Department 

The regional PRD ESG teams act as centers of excellence that deploy ESG subject matter expertise and partner across the Portfolio Review Department (PRD) to drive the success of clients and the business in each region. 

Each region’s ESG team and SMEs are responsible for broader ESG investing topics, such as supporting ESG regulatory implementation, ESG product oversight and ecosystem enhancements, and enterprise-wide ESG strategic initiatives.  

The regional teams and SMEs stay connected on global initiatives such as ESG data and reporting, industry trends, and ESG product roadmaps. The teams closely collaborate with partners across PRD, including colleagues in Manager Search and Oversight and other product category teams. Many members of these teams commit a significant portion of time to ESG efforts as well, such as assessing the ESG competitive product landscape to inform new ESG product design and evaluating active managers on their ESG integration approaches. 

In addition to ESG-dedicated roles, Vanguard continues to embed ESG considerations into existing functions to ensure ESG factors are considered alongside, not separately from, other matters important to improving the investment outcomes of our clients.   

For example: 

Vanguard Fixed Income Group (FIG) assesses the financial materiality of ESG risks to complement standard credit assessment. FIG’s credit research analysts also regularly meet with issuers to discuss key credit risk topics and, where applicable, raise ESG concerns.

Vanguard Investment Management & Finance Risk (IMFR) provides independent oversight and monitoring of investment risk management of sustainability risk. 

Vanguard’s Investment Strategy Group conducts research on both non-ESG and ESG topics which is then shared internally for education and to inform decision-making. This research may also be published.

A list of the external organisation initiatives Vanguard currently participates in that relate to investment stewardship can be found below: (as at December 2025).

• International Financial Reporting Standards (IFRS) Sustainability Alliance [formerly the Sustainability Accounting Standards Board (SASB) Investor Alliance] (2016; Member)
• International Sustainability Standards Board (ISSB) Investor Advisory Group (IIAG) [formerly the SASB Investor Advisory Group] (2016; Member)
• The Investment Association (2016; Member)
• International Corporate Governance Network (ICGN) (2019; Member)
• Asian Corporate Governance Association (ACGA) (2021; Member)

Stewardship Codes

The UK Stewardship Code (Signatory since 2021)

SDR Labelling:

Not eligible to use label (out of scope)