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.
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.
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.
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