So, Vanguard has finally broken its silence and released its first ever coal policy, which, in a shocking twist, actually acknowledges climate risk. Wow! Welcome to 2010, Vanguard. In a perfunctory exercise to satisfy a TCFD mandate, the company vaguely outlined its disclosure expectations for portfolio companies with significant coal exposure. The news came quietly with the firm’s Global Head of Investment Stewardship, John Galloway, posting an update in an elite law review on Friday, so in case you missed it, don’t worry…everyone did.
Several years ago this announcement would have been considered a milestone, but considering it is 2022 and Vanguard is the biggest global investor in coal with $86 billion in industry holdings, this is simply the bare minimum. Sure, it’s worth noting every tiny, infinitesimal step this multi-trillion dollar investor in fossil fuels makes towards acknowledging the global catastrophe that it is instrumental in supporting – but at this point in the climate crisis, gestures like Vanguard’s are so small that they end up being too small.
The real question is, why now, nearly a year after signing onto the Net Zero Asset Managers’ Initiative? Perhaps after years of climate inaction and its visible and glaring absence at COP26 last November, Vanguard is feeling the pressure from activists, the media, its clients, and other VIPs in the financial sector to do something in the hopes of escaping bad publicity. Or, perhaps specific leaders within the company have finally realized that climate risk is investment risk, and in order to calculate risk, it must first be understood and properly disclosed.
Now, though the company is finally addressing the climate risk entailed by coal, it is deftly dodging real commitments, as only Vanguard can. It is requiring companies to provide clear disclosures on the climate competence of the board and on risk mitigation, which is just a baseline. Plenty of other investors have made similarly unremarkable requests of coal companies, which has effectively permitted those companies to ignore the looming disaster they are causing. Since many of these companies are continuing to expand coal production and generation, Vanguard needs to be making demands for disclosure and furthermore, it must be clear about what it will do if and when these coal-heavy companies give suboptimal answers. Accountability is critical because the coal industry at large has no climate transition plan and will inevitably end up as a massive stranded asset. Since Vanguard is the largest equity investor on the planet and invariably one of the largest investors in every coal company, it has the biggest potential, which ultimately means the biggest responsibility, to influence these companies.
So what should Vanguard do next? Something more than lip service would be a good start. Vanguard needs to act with the urgency that the climate crisis demands.
- This year, the asset manager should make it a priority to shift capital out of coal companies in its actively managed funds using the Global Coal Exit List as a guide. Many asset managers, including BlackRock, which has roughly the same percentage of actively managed funds as Vanguard (~$1.6 trillion), are already excluding coal companies and many investors are using the GCEL as a guide.
- Vanguard needs to join its competitors in voting against boards of directors at companies that lack a transition plan consistent with a 1.5C world. This cannot be limited to pure coal mining companies and must include utilities and companies operating along the thermal coal value chain. The asset manager should also take voting action at financial companies which continue to bankroll coal expansion.
- Finally, Vanguard, predominantly an index investor, must commit to exclude and underweight these coal companies from its passively managed funds. Coal poses an immediate risk and should be excluded from active funds and Vanguard should reduce and/or limit coal exposure in passive funds wherever possible. Meanwhile, it should increase its offerings of climate-aligned and climate risk-managed funds, and actively support customers to integrate climate risk management and climate alignment into their investment strategy. Finally, any new funds that Vanguard creates should be automatically 1.5°C aligned. Any climate-aligned fund will have to exclude and underweight heavy emitting companies, so if Vanguard is serious about climate, they cannot keep saying nothing can be done, all while choosing to do nothing.