Lewis Braham: Vanguard's Climate-Change Dismissal

Ted

FYI: (Click On Article At Top Of Google Search)
Quietly, without fanfare, the Vanguard Group has become one of the most powerful forces in Corporate America. The mutual fund company has $3.6 trillion in its mutual and exchange-traded funds—greater than the national net worth of India or Brazil. Look at the top owners of any blue-chip company, and chances are Vanguard is No. 1 or No. 2. That gives it tremendous influence. When Vanguard talks, CEOs listen.

The money manager especially can flex its muscles during proxy season, when shareholders of companies vote on proposals to change corporate policies. But when it comes to proposals related to climate change, Vanguard has chosen the sidelines.
Regards,
Ted
https://www.google.com/#q=Vanguard’s+Climate-Change+Dismissal

Ted

@MFO Members: "As a fiduciary, Vanguard is required to manage our funds in the best interests of shareholders and obligated to maximize returns in order to help shareholders meet their financial goals. It would be exceedingly difficult, if not impossible, to fulfill these obligations while managing portfolios that reflect the social concerns of all of our shareholders.” In the Linkster opinion Vanguard more than meets it's fiduciary responsibility to their shareholders by providing low cost passive and active funds.
Regards,
Ted

Edmond

The politization of Barrons in recent months, notably trashing Trump at every opportunity, and now with this proposal is very off-putting.

If we are serious about exerting pressure on companies due to environmental concerns, then perhaps we should require dis-investment of US corporations in the most aggregious environmental offender: Red China. Unless China's environmental degredation --- imposed by a bureacratic dictator -- changes it ways, nothing the rest of us do will matter --- other than put our companies at a further disadvantage to their Chinese competitors who have no moral compunctions about trashing the environment...?

Yeah, I didn't think so.
So no, keep the environmental demogogues away from Vanguard, and the corporate boardrooms.

msf

To paraphrase: Vanguard knows better than its shareholders what is in their best interest.
How patronizing.

When Vanguard says that it must maximize returns, is that returns over the next quarter, or over the next decade? Penny wise and pound foolish comes to mind.

Vanguard seems to be saying that it is required to vote this way to meet its fiduciary duties. It is thus tacitly accusing Allianz, Wells Fargo, DWS, Schroeder (which submanages VINEX and VWIGX), and others of breach of fiduciary duty.

http://www.ecowatch.com/is-your-mutual-fund-a-climate-change-denier-or-climate-champion-1882190571.html

(The figures in the article linked to above show that exact voting percentages depend on how you count. Nevertheless, the split among fund companies is clear. Thanks to Lewis for the info on Blackrock's change of heart, since its 2015 voting performance was 0%.)

It gets worse. From a 2014 article (writing about 2014 and earlier votes):

"Industry giant Vanguard remains sole mutual fund to ignore climate-related resolutions for 11th-straight year. ... Vanguard ... has failed to cast a single vote in support of a climate-related resolution in 11 years."

AndyJ

Excellent article. Due to SEC regs, shareholder resolutions typically don't have much in the way of teeth; the resolutions being proposed these days at carbon-intensive firms are all but entirely about financial/investment risk disclosure -- disclosure of the risks, for example, that an oil or coal company takes by pumping billions more into finding new reserves that are very unlikely to ever be developed. There are already, worldwide, 4-5 times the amount of reserves that can be burned without taking the world past the 2C threshold that almost every country in the world has now agreed is the absolute limit humanity can afford.

Financial risk disclosure is the point, which is why the other companies Lewis B. cites in the article are voting for resolutions like these. Voting for them is very much an expression of fiduciary responsibility, not the reverse.

msf

Exactly.

Yet Vanguard asserts: “We will seek appropriate disclosure on ESG issues by the entities in which we invest.” (From the 2014 article I cited above.) Apparently Vanguard feels absolutely no environmental disclosures are "appropriate".

Watch what I do, not what I say.

msf

I wrote: "Thanks to Lewis for the info on Blackrock's change of heart, since its 2015 voting performance was 0%."

Perhaps little has changed.

FT (Nov. 26, 2016) quotes a Blackrock shareholder motion: “BlackRock’s publicly reported proxy voting record reveals consistent votes against virtually all climate-related resolutions . . . even when independent experts advance a strong business and economic case for support.” The FT article goes on to note that Blackrock voted against climate change resolutions in 2016 at ExxonMobil, Chevron, Oxy, and Conoco.

NYTimes, Jan 16: "[D]uring the most recent reporting period ending on June 30,BlackRock voted 96.3 percent of the time to support compensation policies across the Standard & Poor’s 500-stock index, according to Proxy Insight. It also voted against every shareholder proposal relating to diversity, environment, governance and social concerns over the last year"

Is this another case of "watch what I do, not what I say"?

LewisBraham

@MSF For the most part you're right. They both should be ashamed at this point, although in my piece I stated that BlackRock has long voted against such proposals. What's moved the needle is BlackRock's messaging about anthropogenic climate change having a material impact on companies' financial prospects. Vanguard hasn't even gone that far on its web site, claiming environmental proposals are social issues that have nothing to do with its fiduciary duty to shareholders. BlackRock has some other albeit small differences with Vanguard. If you examine BlackRock's ESG and socially responsible funds and ETFs you will see that their voting record differs from BlackRock's other funds, and they do in fact vote in favor of some environmental proposals. The really galling thing about Vanguard is even in its socially responsible fund--Vanguard FTSE Social Index VFTSX--a fund where they know very well that its investors believe in the importance of climate change--it still votes against or abstains from all environmental proposals the last time I checked. That is shameful in my view. Vanguard has given environmentally conscious shareholders no real option. BlackRock at least offers such options that vote differently: https://ishares.com/us/literature/shareholder-letters/proxy-voting-policy-social-index-funds.pdf

But both are still a long way from how a more boutique socially responsible fund shop addresses environmental issues. The fact that Larry Fink at BlackRock has acknowledged climate change as a financial issue with market impacts is an important wedge, though, for investors to say to index fund managers, how can you claim to be upholding your role as a fiduciary if you routinely vote against or abstain from voting on all of these proposals? This is especially so for index fund managers as they must buy and hold stocks in their index forever. They are the ultimate long-term shareholders, meaning that climate change as the ultimate long-term risk will definitely affect the financial prospects of their investments. Shareholders who care about these issues must keep holding their feet to the fire.

I just found BlackRock's iShares voting records for individual ETFs on its site. They should make it easier to do this, but you can see if you look at the ESG themed ETFs they do in fact vote differently: vds.issproxy.com/SearchPage.php?CustomerID=228
Here is a list of their socially-responsible ETFs: https://ishares.com/us/products/etf-product-list#!type=ishares&tab=overview&view=list&fst=50586

sma3

Most people don't pay any attention to what they invest in through their 401k or even a broker. I tried for years to get my Austinite ex hippy sister to pay attention to the multiple large cap funds in her 401k... couldn't be bothered. My son believes in Tesla but won't ask his employer to add TIAA's socially conscious fund to their 401k.

We can add to Vanguard's insensitivity or ignorance ( depending on your fervor of belief in climate change) their opaqueness about their management process.... there may not be a familial dynasty behind the scenes but have you ever tried to figure out how you (supposedly a shareholder) can influence policy at Vanguard, or how mush their mangers are paid or even how they are paid? They don't get stock but there is a special "investment account" that they own shares of. I have tried but have been unsuccessful in finding an annual report or even balance sheet of the Vanguard Management group, even though as a shareholder they "work for me".

The same supposedly "independent" Board of Trustees at Vanguard oversees 198 separate funds, in addition to their day jobs. Obviously they spend little time on proposals that Vanguard management does not support or wants them to see

Perhaps increased pressure on those who are public figures (Amy Gutman head of U Penn) might have an effect... But given the amount of time she spends on Vanguard ( her Wikopedia page lists about 10 other commissions etc she is involved in) and the paltry ($230,000 ) compensation she gets, I doubt it

msf

Thanks for the followup and the additional information. The voting record you describe on VFTSX is indeed inexcusable, and I appreciate your calling attention to that distinction between Vanguard and Blackrock.

Regarding index fund voting ... My very vague recollection of Fidelity's index funds is that when they first started, and Geode (the fund management company) was a Fidelity subsidiary, the index funds voted a little differently, and a little better, than the rest of Fidelity funds. Assuming my memory is correct, this shows that index fund managers can vote at least a little more responsibly.

I just did a very brief, unscientific, pathetically lame check of a couple of Fidelity proxy votes, and this split between its index funds and others seems to be intact.

A couple of index funds I checked (500 Index and Total Market voted for a shareholder proposal giving shareholders greater ability to call special meetings, while the actively managed Fidelity Advisor Energy Fund voted as the Board advised - against the resolution. There was the same split on an analogous resolution at Chevron. Here, I checked a second actively managed fund (Equity Div Income) to confirm the pattern.

Chevron had a longer list of shareholder resolutions. Generally speaking, the index funds tended to abstain, while the actively managed funds voted against, as the board advised. In fairness, all the funds, active as well as index, abstained on the resolution to assess policy impact on 2 degree scenario. But the actively managed funds voted against requiring a director nominee with environmental experience, while the index funds merely abstained.

Not huge differences I know, but evidence that index funds can break with their family siblings and vote if not in favor of shareholder resolutions, at least not against.

LewisBraham

The other interesting outlier here is State Street and its SPDR ETFs. They vote differently on these environmental issues: mobile.reuters.com/article/idUSKCN11C2HK
So it is possible for ordinary index fund managers, not just socially responsible ones to think differently.

I would think in Fidelity's case active managers who want a specific outcome for a proxy vote as they think it would benefit shareholders would vote differently in some cases, although one could argue--and companies like Vanguard and Blackrock do argue this--that all funds should be active in their proxy voting especially on issues like board composition and executive compensation, but also climate change. Both index and active fund shareholders can benefit from well governed companies. So far though you're right that they've been more talk than action.

BenWP

With Scott Pruitt at the helm of EPA, it's going to be hard to sell the idea that climate change is important and that we need to do something about it now.

AndyJ

BenWP said:

With Scott Pruitt at the helm of EPA, it's going to be hard to sell the idea that climate change is important and that we need to do something about it now.

Fortunately, it's already been "sold" to a number of significant states (including CA, the world's 6th largest economy on a pure GDP basis) and a chunk of the private sector in the U.S., and to most other nations on Earth. The incoming administration is poised to be the outlier, by miles.

BenWP

Agree, AndyJ. Hope the outlier can't do too much damage.

msf

"President Trump is committed to eliminating harmful and unnecessary policies such as the Climate Action Plan and the Waters of the U.S. rule. Lifting these restrictions will greatly help American workers, increasing wages by more than $30 billion over the next 7 years."

https://www.whitehouse.gov/america-first-energy
(Embedded links to Climate Action Plan and WOTUS are mine, not in original.)

Assume for the sake of argument that the dollar figures are correct, and disregard any additional health care costs due to increased pollution. At 150M+ workers in the US, that comes out to $200/worker over seven years, $28/year, 50c/week. $30B to workers sounds like a lot until you do the arithmetic.

Start following the real money (read: oil, coal, agribusiness).