(Photo: Shutterstock)

What does a mutual fund or ETF mean when it labels itself ESG for its environmental, social and governance approach and what criteria does it use for including and excluding assets?

Definitions vary; they depend on the fund company and, if it’s a passive fund, on the index it tracks, and that can create problems.

Vanguard, which has three passive funds — two are ETFs — and one actively managed ESG mutual fund, emailed shareholders on Monday that multiple stocks were erroneously included in its ESG U.S. Stock (ESGV) and ESG International Stock (VSGX) ETFs as a result of the “screening methodology” used by the funds’ index provider, FTSE Russell, from June 21 until Aug. 5, but have since been removed.

Among the 11 erroneous holdings in the U.S. stock ESG ETF were gun maker Sturm, Ruger & Co. and oil services company Halliburton. Twenty stocks were erroneously included in the international ESG ETF, including GlaxoSmithKline and Gerdau PN, a South American steel producer.

“Vanguard took action as promptly as practicable to sell the stocks and align the funds’ holdings with the corrected index data,” according to spokeswoman. “Once the holdings reflected the corrected index data, Vanguard notified the funds’ shareholders via email.”

The spokeswoman noted that the stocks “In aggregate, these stocks represented a very small percentage of the holdings of the funds” and their inclusion and subsequent exclusion “had no material impact on the performance of the funds.”

FTSE Russell acknowledged the error, noting that “a small number of securities had been inadvertently included in the FTSE US All Cap Choice index and the FTSE Global All Cap ex US Choice Index at the June index rebalance. Once identified, the issue was rectified and clients informed of the constituent changes.”

On Aug. 2, three days before the erroneous stocks were excluded from the FTSE Russell Index Vanguard changed the wording on its prospectuses for the two ESG ETFs “to provide shareholders with additional details about the index methodology for the funds’ underlying benchmark,” according to a spokeswoman.

Where the old language noted that the index excludes “stocks of companies in the following industries: adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling, and nuclear power” — which should have excluded the Sturm, Ruger & Co. shares — the new language is much more detailed, especially about companies that produce firearms and military, chemical, biological and nuclear weapons and parts.

The prospectus notes that the index “excludes stocks of companies that FTSE Group determines engage in the following activities … produce specific and critical parts or services for, nuclear weapon systems, chemical or biological weapons, cluster munitions, and anti-personnel mines … companies that produce other weapons for military use … companies that produce firearms or ammunition for non-military use.”

Daniel Wiener, co-founder and chairman of Adviser Investments, and editor of the Independent Adviser for Vanguard Investors, said the changes to the indexes are “further proof that classifying companies as being ESG-worthy, or not, is a moving target.”

He noted that the Financial Times reported on July 10 that Vanguard’s ESG ETFs held shares in oil drilling and refiner stocks that “didn’t comport with Vanguard’s original description and definitions” but the changes fix that.

The changes to the Vanguard ETF prospectuses were made just one day before a 21-year-old man killed 22 people and injured 24 with an AK-47 style rifle at a Walmart in El Paso, Texas.