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What Vanguard’s 'proxy voting choice' program could mean for climate investing
Allowing shareholder voting will draw curtain on how much investors really care.
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(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)
CHAPEL HILL, N.C. (Callaway Climate Insights) — Don’t count on Wall Street’s largest asset managers to begin aggressively pushing corporations to adopt more climate-friendly policies.
Don’t blame those managers, however. It may very well be that their clients — the ultimate owners of the investments — don’t want the firms to be that aggressive.
The largest asset managers to which I refer are BlackRock BLK 0.00%↑ , the world’s largest asset manager with an estimated $10 trillion in assets under management, and Vanguard, the second largest with over $7 trillion in AUM. Both firms initially took relatively strong stands urging the corporations in which they invest to become carbon neutral, but more recently have retreated from those stances. Their focus has become giving their clients a say in what pressure, if any, should be put on the companies in which the funds invest.
We’ll soon find out how much.
Vanguard earlier this month announced a pilot program in which investors in three equity index funds will be able to indicate how they want the firm to vote on shareholder resolutions. Unlike a somewhat similar program that BlackRock initiated in late 2021, Vanguard’s pilot won’t be restricted to primarily institutional clients.
As I’ve written before, there are a number of challenges that asset managers such as Vanguard face when giving fund investors a say in shareholder voting. One is the sheer number of resolutions, which could total in the thousands annually at broad index funds such as the Vanguard Russell 1000 Index fund (VRNIX), which is one of the three funds that are part of Vanguard’s pilot project. It would be unrealistic to expect investors to weigh in on each one of those resolutions individually.
Another challenge is that many of those resolutions deal with complex issues that are difficult for an investor to analyze and make sense of. A related obstacle is investor apathy. As I reported in a column last summer, Tumelo — the U.K. firm that is pioneering a number of voter choice efforts — considers itself lucky when even 10% of shareholders choose to respond to requests for input.
Vanguard is sidestepping at least some of these challenges by asking fund investors not to vote on specific shareholder resolutions but instead to select from four different proxy voting policies that provide general guidance on how the firm should vote on particular shareholder resolutions. Each investor’s vote will count in proportion to the dollar value of his investment.
To appreciate the impact that Vanguard’s approach could have on corporations’ climate policies, consider the four proxy voting policy options that Vanguard investors in this pilot program will be asked to vote on:
The Vanguard-Advised Funds Proxy Voting policy. This is the policy that Vanguard up until now has adhered to, in which shareholder proposals “are voted as determined [by Vanguard to be] in the best interests of each fund consistent with its investment objective.”
The Company Board-aligned policy. Under this policy, shareholder resolutions will be voted according to the recommendations of corporate management.
The "Not Voting" policy. Under this policy, Vanguard abstains from voting.
The Glass Lewis ESG policy. If an investor prefers this policy, Vanguard will vote the pro rata ownership position of that investor according to the “proxy voting recommendations from Glass Lewis & Co., LLC, a third-party proxy advisor, consistent with a view that investment returns can be enhanced through a focus on disclosing and mitigating risks related to environmental, social, and governance issues.”
If a shareholder does not select one of the four proxy voting policies, then Vanguard will vote his pro rata ownership position in accordance with the first of these four policies.
One consequence of Vanguard’s approach could be that attention to climate issues will become significantly diluted. To illustrate, imagine that — consistent with Tumelo’s experience in the U.K. — just 10% of investors in a given Vanguard fund respond to the pilot program’s survey. This means that, even if 50% of investors who do express a preference vote for the “Glass Lewis ESG policy,” just 5% of the fund’s total shares will be voted as an ESG investor might hope.
And even that overstates the impact on corporations’ climate policies. That’s because the Glass Lewis ESG policy is itself wide-ranging, with climate just one part. The policy encompasses issues as varied as board diversity, executive compensation, corporate governance issues, shareholder rights, animal welfare, human rights, and tobacco.
Each of these other issues is important, needless to say. But climate-focused investors were hoping that Vanguard could be persuaded to bring the full weight of its huge AUM to bear in pressuring companies to become carbon neutral. But that won’t happen even if investor choice programs are adopted at all Vanguard mutual funds and ETFs — unless all investors in those funds direct Vanguard to vote all shareholder resolutions with an exclusive focus on climate change.
That is not how all fund investors would vote, however, at least currently. Many don’t consider climate change to be human-made, and even among those who do, many believe that there are more pressing issues that corporations should be addressing. No matter how misguided you think these other investors are, it is profoundly undemocratic to want Vanguard to vote all shares in a certain way when other shareholders disagree. This is one of the reasons that Vanguard’s erstwhile climate focus triggered such a strong backlash in conservative circles.
To avoid being undemocratic, climate-friendly investors have little choice but to engage in a widespread educational and political campaign to persuade their fellow investors about the urgency of working towards carbon neutrality.
We’re about to get a real-world assessment of how widespread that campaign will need to be. You may need to hold your breath, since it’s entirely possible that this assessment will reveal a much lower appetite for swallowing the corporate medicine necessary to move towards carbon neutrality.
I should add that BlackRock’s proxy voting choice program faces similar difficulties as Vanguard’s. In BlackRock’s case, fund investors who are eligible to participate in the program are allowed to choose between 14 separate proxy voting policies, rather than four in the case of Vanguard. Just one of those 14 BlackRock policies has “climate” in its name. There’s a real possibility that we will discover that there is a disturbingly small proportion of investors who really want climate change mitigation to be the sole criterion for shareholder voting.
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