As we chronicle daily at ESG Today, sustainability is emerging as the defining investment trend of the decade, driven primarily by an emerging social consciousness among investors and a renewed appreciation among capital owners that the concept of risk extends beyond the direct financial impact of decisions on project level. Sustainable investing is a broad discipline that covers multiple aspects of the investment process, from financing projects using sustainability-linked financial instruments, to avoiding risks by focusing on companies with a favorable ESG rating, to proxy voting to influence the behavior of companies.
Not surprisingly, as investor demand for action on sustainability has grown, it has often taken the form of putting pressure on influential asset managers to drive change at the corporate level. For example, in recent months the market has seen investment giants such as BlackRock and State Street publicly declare that they will actively embed sustainability considerations into their investment processes, including using proxy voting to drive change, and divest from companies that do not meet the required requirements to fulfil. ESG profile. These are not easy decisions for asset managers, who, as managers of investments, must first and foremost consider their fiduciary duties to their clients and tailor their activities accordingly.
Of the largest investment managers, Vanguard – a long-time champion of investment management – is one of the most circumspect when it comes to approaching taking action on sustainability… yet. Vanguard has published a report outlining expectations for companies and their boards regarding climate risk management, and a companion report detailing examples of recent proxy voting positions the company has taken to support this position.
The approach Vanguard describes is characteristically measured. Vanguard outlines the company’s proxy voting process regarding climate-related shareholder proposals, describing a process that first determines the materiality of the risk the climate issue poses to the company and the scope of actions presented in the proposals, favoring more disclosure and goal setting. Vanguard describes the process as follows:
“We carefully analyze every climate-related proposal. At companies where climate matters pose material risks, funds are likely to support shareholder proposals that seek reasonable and effective disclosure of greenhouse gas emissions or other climate-related metrics. The funds can also support proposals that ask companies to pursue climate risk reduction targets, such as those aligned with the goals of the Paris Agreement.
“The funds are unlikely to support proposals that require companies to make specific operational changes, such as phasing out a business or product; we generally view such proposals as overly prescriptive.”
The company tends not to use the voting process to drive direct operational changes, preferring direct involvement to address these issues:
“Vanguard has had a broader and deeper impact on climate-related matters through our direct engagements with portfolio companies. Last year we spoke to more than 250 companies in carbon-intensive industries. We also regularly discuss climate risks with companies that are not active in the main carbon-producing and carbon-consuming sectors. Few companies will be completely insulated from the impacts of climate change.”
Vanguard then outlines its expectations for companies and their boards. First and foremost, the company expects appropriate corporate oversight of climate risks, with proper disclosure that gives investors insight into corporate decision-making and management of climate-related risks and opportunities.
At the board level, Vanguard expects that long-term strategic considerations will take into account not only the physical risk aspect of climate change, but also transition risk, including regulatory changes, technological disruption and changing consumer preferences. Vanguard calls on ‘climate competent’ boards of directors, which include directors with relevant experience in the field of climate or business adaptation, who seek diverse perspectives, such as input from different regions or sectors, and engage in continuing education with experts, stakeholders and industry groups.
Vanguard’s recently published guidance on its position on climate risk management outlines a measured approach that, at first glance, is less aggressive than its peers but could ultimately prove highly effective, an approach that seeks a path aligned with his view of his confidant. duties, while setting clear, specific expectations of company management and boards of directors as they address this growing and disruptive risk.