In late September 2021 , the Europe-based organization Universal Owner, led by founder Thomas O’Neill (also a cofounder of InfluenceMap), released an important report on Vanguard, the world’s second largest asset manager, which controls assets worth US$7.2 trillion, including U.S. equities worth US$5.7 trillion.
The report explains that Vanguard is a “universal owner,” a term with which our readers are familiar, because it invests in the entire market and for the long term. This broad diversification means that Vanguard and its clients largely depend on the success of the markets overall and that the performance of individual companies is a secondary element in their success (or failure). But Vanguard still focuses its climate stewardship on climate risk mitigation at individual companies, rather than prioritizing an overall strategy to slow warming and reduce greenhouse-gas emissions and concentration globally. As the report explains, “reducing the risk that individual companies face from climate change is not the same as reducing the risk that individual companies pose to the climate.”
By choosing not to prioritize protection of the climate system, Vanguard is declining to serve the interests of its diversified investors. The report concludes that “[i]n failing to act as a universal owner, Vanguard is therefore abdicating its fiduciary responsibility to act in the best interests of its beneficiaries.”
If this sounds familiar, it may be because it echoes the blockbuster report from international law firm Freshfields that we summarized in our last issue. That report specifically highlighted the need for diversified investors to focus on systemic issues:
The more diversified a portfolio, the less logical it may be to engage in stewardship to secure enterprise specific value protection or enhancement. Diversification is specifically intended to minimise idiosyncratic impacts on portfolio performance…
Yet diversified portfolios remain exposed to nondiversifiable risks, for example where declining environmental or social sustainability undermines the performance of whole markets or sectors… Indeed, for investors who are likely to hold diversified portfolios in the long-term, the question is particularly pressing since these are likely to be the main ways in which they may be able to make a difference.
These recent reports suggest that it is time for Vanguard to change its orientation from company-first to systems-first investment. We will be watching for progress.