Okay, so the funds we own:
1. Fidelity International Sustainability Index Fund (FNIDX) which "seeks to provide investment results that correspond to the total return of the MSCI ACWI (All Country World Index) ex USA ESG Index."
2. Vanguard ESG International Stock ETF (VSGX) which "seeks to track the performance of the FTSE Global All Cap ex US Choice Index."
One thing that jumped out at me right away is some notable differences in composition between the funds. For example, FNIDX holds Total S.A. while VSGX does not, and conversely, VSGX holds Nestlé S.A., while FNIDX does not. I wanted to know why.
About the indexes:
andThe MSCI ESG Leaders Indexes are constructed by applying a Best‐in‐Class selection process to companies in the regional indexes that make up MSCI ACWI, a global equity index consisting of developed and emerging market countries. The ESG Leaders Indexes target sector and region weights consistent with those of the underlying indexes to limit the systematic risk introduced by the ESG selection process. The methodology aims to include securities of companies with the highest ESG ratings representing 50% of the market capitalization in each sector and region of the parent Index. Companies that are not existing constituents of the ESG Leaders Indexes must have an MSCI ESG Rating of 'BB' or above and the MSCI ESG Controversies Score of 3 or above to be eligible. In addition, companies showing involvement in alcohol, gambling, tobacco, nuclear power and weapons are excluded from the Indexes. The selection universe for the ESG Leaders Indexes is the constituents of the MSCI Global Investable Market Indexes.
-- MSCI ACWI EX USA ESG LEADERS INDEX (USD) pdf.
So Total S.A. isn't part of VSGX because its index excludes petroleum companies. That's pretty objective. The two indices simply have some differences in the categories of companies they objectively exclude.The FTSE Global All Cap ex US Choice Index excludes stocks of companies that FTSE Group determines engage in the following activities: (i) companies that produce adult entertainment; (ii) companies that produce alcoholic beverages; (iii) companies that produce tobacco products; (iv) companies that (a) produce or (b) produce specific and critical parts or services for, nuclear weapon systems, chemical or biological weapons, cluster munitions, and anti-personnel mines; (v) companies that produce other weapons for military use; (vi) companies that produce firearms or ammunition for non-military use; (vii) companies that own proved or probable reserves in coal, oil, or gas; (viii) companies that provide gambling services; and (ix) companies that generate revenues from nuclear power production or related activities (including equipment, construction, and uranium). The index methodology also excludes the stocks of companies that, as FTSE Group determines, do not meet the labor, human rights, environmental, and anticorruption standards as defined by the United Nations Global Compact Principles, as well as companies that do not meet certain diversity criteria.
-- VSGX prospectus.
But why is Nestlé S.A. missing from FNIDX? Since it's not among any of its index's excluded categories, it must be due to the ESG rating/score.This is where things get very subjective and squishy. I found this evaluation by MSCI of Nestlé S.A:
Other than this PDF mirrored on a random German web site, I can't find anything specific to Nestlé's (or any other company's for that matter) MSCI ESG score. There's plenty of methodology papers on the MSCI site about how the ESG index is derived, but the raw data feeding the index is publicly unavailable. I can imagine why this is, but it doesn't make the MSCI ESG rating very transparent.Nestle S.A. is involved in controversies related to its Labor Rights, Customers, Environment and Human Rights impacts. It faces significant concerns related to Supply Chain Labor Standards, Child Labor, Anticompetitive Practices, Marketing & Advertising, and Water Stress.
-- https://www.smart-und-fair-fonds.de/med ... ort_3_.pdf
Meanwhile, the FTSE ESG index appears to be less squishy than the MSCI ETF index since it doesn't use these arbitrary scores, but rather companies that do not meet "standards as defined by the United Nations Global Compact Principles."
I'm not thrilled by the subjective aspect of ESG investing in FNIDX. I'd like access to the MSCI ESG scores and raw data as an investor in FNIDX. But it is what it is. At the end of the day, we own a very small bit less Nestlé and Total than we otherwise would.