Understanding stewardship: how Vanguard engages with companies on behalf of investors

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  • Investment stewardship activities are an important way for asset managers to safeguard and promote long-term sustainable value for investors.
  • Index funds inevitably have exposure to risks that could have a material financial impact on the companies we invest in, including ESG risks. That is why we engage with companies about such risks through our investment stewardship activities.
  • Engaging with companies and voting in response to issues can be powerful tools.

 

By Lisa Harlow, Head of Investment Stewardship, Vanguard Europe.

One of Vanguard’s roles as an asset manager is to steward, or oversee, the assets that investors have entrusted to us to help achieve their long-term financial goals. This why we place great emphasis on the role of investment stewardship.

Vanguard launched the first index fund for individual investors more than 45 years ago and now 30m investors worldwide1 trust us with their savings. Many of these investors will be saving over multiple decades, often for retirement, so it is important we safeguard and promote long-term value for our investors through our stewardship activities. 

When an index-fund manager like Vanguard invests in a company, it is likely to own that company for as long as it appears in the index. Our index funds inevitably have exposure to risks that could have a material financial impact on the companies we invest in, including environmental, social and governance (ESG) risks. Selling a company – or buying less of a stock than is represented in an index – is not an option. That is why we engage with companies about such risks through our investment stewardship activities.

We understand that, for some investors, owning certain companies is not consistent with their values. For these investors, we offer exclusionary index funds that screen out (or exclude) companies or sectors, based on specific ESG criteria. However, we also believe that ESG risks can be addressed by owning and engaging with companies through broadly diversified index funds.

What do we mean by stewardship and engagement?

Vanguard Stewardship

Vanguard created its stewardship team nearly 20 years ago with responsibilities for voting as well as engagement across all equity index funds. On behalf of our investors, we exercise voting rights (known as proxy voting) and we speak with companies on a range of issues that we identify through data analysis and research.

Our global investment stewardship team meets (or engages) with hundreds of companies every year. We talk directly to board members and company executives about how they are governing material risks and we hold them accountable for good governance practices. We believe that engaging actively with companies in this way can be a more effective way to encourage proper risk oversight than selling a stock.

Engagement essentially starts with reviewing our portfolio companies. We talk to the companies that represent the largest holdings in our portfolios and also identify any companies where we may need to talk about specific material risks to their business. These could include climate change or social risks in their communities or workforces as well as issues related to board diversity, succession planning and how they have responded to recent incidents. We talk to the chairs and chief executives to determine how they assess these risks and disclose them to the market.  

We find that companies value the perspectives of long-term investors. An oil company, for example, might ask what type of climate disclosures would be helpful for investors. This is a good opportunity to set out what more the company could be doing and hold it accountable for progress.

We don’t dictate company strategy, but we want to understand a company’s strategy and know that the company is well-governed.  Good governance starts with a good board of directors. We want assurances that a board has the right people, the right experience, appropriate diversity (in terms of skills as well as personal characteristics), is independent and can challenge executives.

What you measure, you manage

Effective disclosure of material risks by companies is essential if investors are to understand those risks and how companies are taking appropriate steps to manage them.

In our engagements with companies where climate change is a significant risk, for example, we expect boards to have sufficient expertise in climate change to understand how it could affect their business. We expect the board to apply independent oversight of those risks and to set appropriate climate-risk mitigation targets that are aligned with the goals set out in the Paris Agreement2. Finally, and critically, we expect boards to disclose climate risks using investor-focused frameworks, such as the Task Force on Climate-Related Financial Disclosures (TCFD).

Voting where we don’t see progress

We believe our year-on-year engagements with companies can be an effective way to protect the interests of investors. The funds can also vote to raise concerns when a company fails to make progress or is unresponsive to the market.

Through investment stewardship activities, broad-based index funds have an important role to play in ESG investing

Lisa Harlow, Head of Investment Stewardship, Vanguard Europe

The funds cast votes to elect/re-elect board directors and also vote on management and shareholder proposals. We consider all proposals on a case-by-case basis and take into account a wide range of perspectives before deciding how to vote on behalf of each fund, including the input from our engagements with companies as well as discussions with activists and third parties.

Index funds have a role in ESG investing

We firmly believe that, through investment stewardship activities, broad-based index funds have an important role to play in ESG investing. Engaging with companies and voting in response to issues can be powerful tools.

Rather than sell a company and lose our ‘voice’, we believe that by staying invested and encouraging companies to take positive action on material ESG risks, including climate risks, we can support good governance and responsible risk management and ultimately deliver long-term sustainable value for our investors.

 

1 Source: Vanguard as at 31 December 2021.

2 The Paris Agreement is a legally binding international treaty negotiated and signed in 2015 that set long-term goals to reduce greenhouse gas emissions and limit global temperature increases; 192 nations and the European Union have joined the agreement.  

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Important information

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The information contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.

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