By Sean Hagerty, managing director, Vanguard, Europe

 

More than 30 million individual investors around the world have chosen to entrust Vanguard with their hard-earned savings. We have a singular goal to maximize their long-term returns and give them the best chance for investment success as they save for retirement, a child’s education, a home or simply a more secure financial future. It’s a responsibility that we take seriously.

Approximately 80% of our clients’ assets globally are invested through index funds1, which provide broadly diversified access to equity and bond markets at minimal cost. Our index funds inevitably have exposure to material financial risks through the companies we invest in – which may therefore impact our investors’ long-term returns. Climate change, which will have far-reaching economic consequences for companies, financial markets and investors, is a clear example of one of those risks.

The role of index funds

Index fund managers buy and hold all securities included in a benchmark index and capture the return that the market provides. Their role is not to choose the securities in a fund or to dictate a company’s strategy or operations. However, index funds do have a role in identifying and understanding risks to investors’ returns, which is why disclosure of those risks by companies is a critical priority for Vanguard.

We engage with the companies held by Vanguard funds to understand how they address material risks, including climate risk, in the interests of long-term investors.

For companies where climate risk is a material risk, we encourage boards to have appropriate expertise to understand how this risk could affect their business and also encourage companies to demonstrate effective oversight and disclosure of material risks.

Commitment to investors

Vanguard has been doing research to understand how climate change could affect the global economy and financial markets in the coming decades. For example, in a recent research paper, The Economics of Climate Change, Vanguard economists used consensus scientific data to assess the impact of climate change on economic activity under four different scenarios for greenhouse gas emissions and resulting temperature increases. The net impact on global GDP is negative in all scenarios. We continue to pursue research efforts such as these to educate both our clients and investment teams about the ways climate change may affect economic growth and investment returns.

Alongside our research efforts and engagements with companies in our index funds, we stand ready to help policymakers, who are specifically empowered to address the complex societal impacts of climate change and its difficult trade-offs. Our hope is that policymakers will set long-term expectations that provide clarity to individuals, companies and the financial markets as to government plans and targets.

We are also committed to providing investors with the information and products they need to make sound investment choices, including products designed to meet net-zero objectives, to help them navigate the risk that climate change can pose to their returns.

While index funds have an important role, we do understand that for some investors, owning certain companies is not consistent with their preferences. For these investors, we offer exclusionary index funds that seek to avoid or reduce exposure to certain companies and sectors. Alternatively, our active ESG funds allocate to companies based on specific sustainability criteria.

We will continue to publicly report on our efforts with respect to climate risk and will continue to make decisions independently, grounded in our deep commitment to our investors and their financial well-being.

 

1 Source: Vanguard as at 31 October 2022.

 

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

For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). In Switzerland for professional investors only. Not to be distributed to the public.

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.

The information contained in this document is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

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Issued in Switzerland by Vanguard Investments Switzerland GmbH.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

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© 2022 Vanguard Asset Management, Limited. All rights reserved.