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Vanguard’s Sins are Ones of Omission

Vanguard has released its semi-annual stewardship report outlining the company’s current approach to, and record on, corporate engagement and proxy voting this shareholder season. The report offers few insights into Vanguard’s characteristically opaque stewardship priorities and disappointingly falls short of outlining concrete strategies for what the asset manager will do if companies in its portfolio fail to mitigate climate risks to their businesses.

There are a few welcome details in this report. Vanguard is upholding its new trend of disclosing the number and names of companies (801 so far this year) that its Investment Stewardship team engaged during the first six months of 2022. The asset manager is rightfully requesting more disclosure on how boards and management teams are identifying and mitigating material risks to their businesses. It is also setting expectations that “companies should have in place governance structures that serve as a safety net to safeguard and support foundational rights for shareholders.” While these are steps in the right direction they fall far short of what is needed from asset managers today.

While setting expectations for governance to protect shareholder rights is nice, Vanguard falls short of including stakeholders and other interests directly impacted by companies’ governance and environmental/social impact, including workers, local governments, and local communities.

Disclosing the companies it engages with is good, but Vanguard omits – or perhaps it lacks altogether- the criteria it is using to determine how it prioritizes engagement in the first place. This omission is especially glaring when it comes to climate risk. It also fails to detail the outcome of its engagements, which leaves one wondering what if any impact Vanguard’s stewardship team is having on behalf of its clients.

While there is still much to desire from the asset management industry at large, peers like BlackRock have managed to at least establish concrete criteria that directs its engagement with the most carbon intensive public companies. Vanguard too must be explicit about what criteria is being used to determine prioritization. To curb the climate crisis and protect its clients there are key sectors that Vanguard must prioritize including energy, utilities, finance, and other companies driving deforestation. More importantly, what Vanguard fails to address in its engagement strategy is what concrete steps the asset manager will take if companies in its portfolio are failing to mitigate climate risks to their businesses.

In the report, Vanguard states that its Investment Stewardship team employs a
regionally focused model, and that “all engagement, company research, analysis, and voting activities are overseen by senior leaders responsible for particular regions and markets.” It is very concerning that a company the size of Vanguard is not actively expanding its stewardship team. As of 2021, its stewardship team comprised 35 professionals across the globe. As a comparison, BlackRock employs a team that is twice that number. As a result, Vanguard continues to showcase one of the worst voting records in the industry when it comes to climate-related shareholder resolutions. Between January and July 2022, Vanguard voted for only 8% of environmental related shareholder proposals compared to 20% in the same timeframe last year. Vanguard’s rationale that many shareholder proposals focused on social or environmental policy lacked a clear link to material risks and were overly prescriptive is shortsighted to say the least. Evaluating the appropriate climate risk mitigation strategy only through the lens of what maximizes shareholder value for that singular company is imprudent. Vanguard is a universal owner of the economy and is therefore uniquely placed to take a broader, all-of-market approach that extends beyond the boundaries and limitations of a corporate board. Additionally, Vanguard serves a customer base that seeks to maximize its overall portfolio while minimizing risks and increasingly demanding climate safe products.

Lastly, in the report, Vanguard vaguely mentions that the company is “exploring ways to expand proxy voting options to give investors a greater voice in the proxy voting process”. This seems to be a new concerning trend in the industry, and Vanguard as per usual, fails to share in detail what this means for the company. Without more details there is no way to know if this is a disguised way for Vanguard to abdicate its responsibilities as a shareholder.

Vanguard seems to be determined to stay the course and continue to conduct business-as-usual with its portfolio companies. While there is a renewed emphasis on disclosure and mitigation of material risk, there is a glaring lack of clarity and precision around climate risk. Vanguard follows guidelines about material risk, but neither explains what they are, nor how certain proposals fare against them. Most importantly, there does not seem to be a consistent standard by which climate risk is assessed as material risk. Vanguard has broadly acknowledged that climate is a material risk, but it fails to make the obvious and direct connection between the two. It seems Vanguard expects its investors to take its judgments at face value without providing any details about the criteria of judgment. If Vanguard is serious about protecting the long-term returns of its clients, it must stop using omission to evade accountability.

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