As we describe daily at ESG Today, sustainability is emerging as the defining investment trend of the decade, driven primarily by an emerging social consciousness among investors, and a renewed appreciation among owners of capital that the concept of risk extends beyond the direct financial consequences of project-level decisions. Sustainable investing is a broad discipline, covering multiple aspects of the investment process, from financing projects using sustainability-linked financial instruments, to risk avoidance by focusing on favorably ESG-rated companies, to proxy voting to influence the behavior of companies.

Not surprisingly, as investor demand for sustainability-themed action has grown, this has often taken the form of pressure building on influential investment managers to push for change at the company level. Thus, in recent months, the market has seen investing giants like BlackRock and State Street publicly declare to actively embed sustainability considerations in their investment processes, including using proxy voting power to push for change, and to divest from companies that did not fit the requisite ESG profile. These are not simple decisions for the asset managers, who, as investment stewards, must first and foremost take their fiduciary duties to their clients into consideration, and align their activities with these considerations.

Among the largest investment managers, Vanguard – a long-time champion of investment stewardship – has been one of the most circumspect regarding its approach to taking action on sustainability issues…until now. Vanguard has published a report outlining its expectations for companies and their boards regarding climate risk governance, and an accompanying report detailing examples of recent proxy voting positions the company has taken to support this position.

The approach Vanguard describes is characteristically measured. Outlining the firm’s proxy voting process regarding climate-related shareholder proposals, Vanguard details a process of first determining the materiality of the risk the climate issue has on the company, and the scope of actions being presented in the proposals, with a preference given to increased disclosure and target setting. Vanguard describes the process as follows:

“We carefully analyze every climate-related proposal. At companies where climate matters present material risks, the funds are likely to support shareholder proposals that seek reasonable and effective disclosure of greenhouse gas emissions or other climate-related metrics. The funds may also support proposals that ask companies to pursue climate risk mitigation targets, such as those aligned to the goals of the Paris Agreement.

“The funds are unlikely to support proposals requiring companies to make specific operational changes, such as phasing out a business or product; we generally view such proposals as overly prescriptive.”

The firm tends to avoid using the voting process to push for direct operational changes, preferring to use direct engagement to address these issues:

“Vanguard has had a wider and deeper impact on climate-related matters through our direct engagements with portfolio companies. Last year, we spoke with more than 250 companies in carbon intensive industries. We also regularly talk about climate risk with companies beyond those in the top carbon-producing and carbon-consuming sectors. Few companies will be entirely insulated from the impacts of climate change.”

Vanguard goes on to lay out its expectations for companies and their boards. First and foremost, the firm expects appropriate oversight by companies of climate risks, with proper disclosure that enables investor insight into company decision-making and management of climate-related risks and opportunities.

At the board level, Vanguard expects long-term strategic considerations to take into account not only the physical risk aspect of climate change, but the transition risk as well, including regulatory changes, technological disruption and shifting consumer preferences. Vanguard appeals for “climate-competent” boards that include directors with relevant climate or business adaptation experience, seek diverse perspectives such as input from various geographies or sectors, and engage in ongoing education with experts, stakeholders and industry groups.

Vanguard’s newly published guidelines for its stance on climate risk governance lays out a measured  approach that, on the surface, is less aggressive than its peers, but may ultimately may prove highly effective, one that seeks a path in line with its view of its fiduciary duties, while setting clear, specific expectations of company management and boards in addressing this growing and disruptive risk.

Click here to see the new documents published by Vanguard.