With more than 50 million clients globally who look to us to both safeguard and grow their investments, we think about environmental, social and governance (ESG) issues in the context of delivering long-term value to our investors and helping them to meet their objectives.
We believe that material ESG risks, if left unchecked, can undermine long-term value in the companies in which we invest. Over time, well-governed companies, including those with sound practices to mitigate material ESG risks should outperform those that are poorly governed. As a result, we integrate ESG considerations into our investment processes and our product design in a number of ways.
As long-term owners of the companies in which our funds invest, we engage with companies on material ESG issues as we believe they can impact long-term value creation.
Many of our active funds aim to allocate capital to companies based on how they manage ESG considerations, alongside other factors, even where they don’t have an explicit ESG investment strategy.
We develop products that allow investors to avoid exposure to companies that are not aligned with their values, or to mitigate certain ESG risks.
As an investment manager and the steward of our clients’ assets, Vanguard has a duty to maximise total return for investors and to seek to encourage portfolio companies to take appropriate steps to mitigate material risks to those returns. Vanguard considers climate change—and the evolving global policy responses required to mitigate its impact—to be a material and fundamental risk to companies and to their shareholders’ long-term financial success.
Accordingly, we have an important role to play in engaging with, and encouraging real progress by, portfolio companies to mitigate the potential consequences of climate change.
To safeguard the investments of Vanguard’s 50 million clients worldwide, our global stewardship team engages with boards and management teams regularly; votes on issues at company annual general meetings and director appointments; and advocates for effective stewardship with long-term shareholder value in mind.
Individuals who represent the interests of all shareholders should be independent, capable and experienced. In addition, we want boards to have appropriate gender and ethnic diversity, as well as diversity of thought and background.
Boards are responsible for effective oversight of relevant material risks, including environmental and social risks, and governance of the company’s long-term strategy.
Compensation policies linked to long-term performance are fundamental drivers of sustainable, long-term value for a company’s investors.
Corporate governance structures should empower shareholders and ensure accountability of the board and management.
We look to the managers of our active funds to assess companies’ ESG risks on a case-by-case basis. Incorporating ESG risk into security selection for active funds without an explicit ESG mandate does not preclude the fund from investing in certain companies or sectors because of their business activities. Rather, it ensures ESG risks and opportunities are considered alongside other factors when selecting investments.
Fixed income is managed internally at Vanguard with ESG risk assessment analysed by our in-house credit research team. For internally managed funds, Vanguard’s Fixed Income Group integrates ESG into its investment process by systematically assessing the financial materiality of ESG risk, to complement standard credit assessment.