Vanguard is the latest investment manager to raise climate risk and gender diversity as governance issues that can influence long-term company performance.
State Street Global Advisers this year took a very public stance on boosting gender diversity, while investors ranging from Calpers to the New York State Comptroller have taken action on climate risk in 2017. This is on top of BlackRock, State Street and Vanguard all reportedly bolstering their corporate governance teams earlier this year.
Vanguard manages around $4 trillion in assets, according to the company website. In a letter to public companies, Bill McNabb, Vanguard’s chairman and CEO, notes the firm’s ‘evolving position’ on climate risk and gender diversity. He says this evolution has come from a better understanding of the impact these issues can have on the bottom line for Vanguard investors.
‘Climate risk is an example of a slowly developing and highly uncertain risk – the kind that tests the strength of a board’s oversight and risk governance,’ McNabb writes. He calls on investors, boards and management to encourage greater disclosure of sustainability risks, pointing to Vanguard’s own involvement with the Sustainability Accounting Standards Board.
The firm showed this year that it is prepared to flex its muscles on climate risk, having voted in support of two climate-related shareholder proposals. Both were at US energy companies that were being asked to improve their disclosure around climate risks and, according to Vanguard’s annual report, were lagging the rest of the energy industry in this regard.
CamberView Partners describes this as a ‘historic pivot’ in a review of McNabb’s letter. ‘Vanguard’s focus moving forward will be on evaluating the materiality of corporate disclosure of climate risk and management oversight of that risk,’ the co-authors write. ‘This will require renewed and careful effort by companies to message and engage constructively with investors around these issues, including shareholder proposals, and raises the strong possibility that more climate-related proposals will pass in the coming year.’
This rise in engagement comes as shareholders are reportedly getting better at putting together resolutions that position climate-related issues as business risk factors.
Gender diversity: An ‘economic imperative, not an ideological choice’
With women occupying only 18 percent of board seats globally – 20 percent in the US, and 26 percent in western Europe – McNabb also calls for boards to focus on ensuring a better gender balance.
‘There is compelling evidence that boards with a critical mass of women have outperformed those that are less diverse,’ he writes. ‘Diverse boards also more effectively demonstrate governance best practices that we believe lead to long-term shareholder value. Our stance on this issue is therefore an economic imperative, not an ideological choice.’
Vanguard calls on issuers to be willing to discuss how they are moving toward a more gender-diverse board, both in public disclosures and in engagement with shareholders. Within the last year, the fund voted in favor of one shareholder resolution asking a Canadian materials company to adopt and publish a policy governing gender diversity on its board.
Encouraging more engagement
Vanguard’s annual report shows that it engaged with 954 companies during the 2017 proxy season – a significant increase on the 817 engagements in 2016 and the 685 in 2015.
‘As we analyze ballot items, particularly controversial ones, we often invite direct and open-ended dialogue with the company,’ McNabb writes. ‘We seek management’s and the board’s perspectives on the issues at hand and we evaluate them against our principles and leading practices. To understand the full picture, we often also engage with other investors, including activists and shareholder proponents.’
McNabb says there is a growing role for independent directors to play a part in shareholder engagement, particularly as it relates to CEO compensation and board composition. This is a continuation of a theme he has mentioned in his last two public letters to issuers.
‘Our interest in engaging with directors is by no means intended to interfere with management’s ownership of the message on corporate strategy and performance,’ he writes. ‘Rather, we believe it’s appropriate for directors to periodically hear directly from and be heard by the shareowners on whose behalf they serve.’
