Vanguard Group Inc. (Vanguard) is the largest shareholder of almost every listed company in the United States (US) with US$7.2 trillion in assets under management (AuM) and has publicly committed to the Net Zero Asset Managers initiative pledging to slash emissions by 2030 and to be net zero across all investments by 2050.

However, Vanguard still has a significant stake in fossil fuel companies as it represents 6% of their total assets with a value of around US$290 billion at the time of publication. This number makes Vanguard the world’s largest investor in fossil fuels and demonstrates the power Vanguard has to influence action on climate change. Furthermore, the group has no formal coal exit policy and no proactive plans to address environmental issues. In 2020, Vanguard opposed all Climate Action 100+ proposals and instead sided with management on the majority of shareholder propositions. 

Vanguard’s minimal expenditure on corporate governance and their small stewardship team further highlights their climate reluctance. Their stewardship team only consists of 35 employees voting on 168,000 proposals in 170 countries which translates to 4800 proposals per Vanguard stewardship employee. As a result in 2020 Vanguard did not engage with at least 95% of the companies that it owns in comparison with competitors like BlackRock which engaged with at least 24% of its companies. Under resourcing of stewardship and engagement contributes to ineffective and inactive climate participation.

Holding enormous power to shape management decisions that can have climate impact, Vanguard averages a 9.6% stake across companies listed in the S&P 500 and controls 5% of almost every company. With this power in the market, Vanguard could easily become a climate leader instead of its current climate lag by implementing simple changes to its business proceedings.

This paper provides recommendations such as divesting from their fossil fuel exposure. Fossil fuel investments have shown to underperform the market which is reflected in Vanguard’s largest fund, the Total Market Index Fund (VTI) which has underperformed by 5.6% to the comparable MSCI US ex Fossil Fuels Index. The three fossil fuel exposed holdings in the Vanguard Wellington Fund (VWELX), which contains 3.39% or US$3.78bn of fossil fuel exposure, have underperformed the S&P 500 by 30-45% each since January 2020.

The paper provides recommendations:

• Commit to a coal exit policy that phases out thermal coal and coal power from all portfolios, with a particular focus on any firm building new capacity
• Adopt index benchmarks for all funds to progressively reduce exposure to fossil fuels
• Adopt investment stewardship guidelines that prioritise addressing climate risk. This means not just disclosing climate risk, but supporting activities that address climate-related business risks
• Provide transparency around company engagements, particularly those concerning climate with time-limits and consequences

1. Public opinion polls show that majority of the U.S populations (60%) are in favour of policies that reduce fossil fuel usage.
2. Vanguard could be the 'champion' of investors due to its market and economic power which has the capacity to fast-track action on climate change.
3. Transparency is a key issue in regards to Vanguard as it does not allow consumers to access basic climate risk information about their investments. Portfolio composition files (PCFs) are only made available to the National Securities Clearing Corporation and are only authorised to market participants. PCFs which identify bonds within a fund are not made available to investors nor public audiences.
4. In the US, Vanguard markets only five ESG labelled funds to investors, constituting US$20bn AuM at 31 May 2021 which is 0.2% of Vanguard's total.
   
5. ShareAction assessed 102 climate proposals against the top 75 asset managers on their responsible investments globally. According to ShareAction, Vanguard voted in favor of just 15% of the 102 climate proposals. Vanguard was ranked on ESG themes and was rated one of the worst performers and was given an 'E' fail rating (the lowest possible).
6. Morningstar evaluated 40 global asset managers and 145 funds, all five of Vanguards ESG funds received a Basic rating and an overall ESG score of low.
7. A Harvard Law study showed that the big three asset managers (Vanguard, BlackRock and State Street) could cast as many as 40% of votes with the S&P 500 as early as 2040. In a alternate study the authors argued that voting control in the majority of U.S public companies will be controlled by 12 management professionals in the big three. Demonstrating how powerful these companies are and the huge potential in leading the world towards positive ESG growth.
8. Vanguard does not have a coal exit policy and has been non-committal towards how its’ funds vote on climate-related shareholder proposals. However, Vanguard could champion investor’s best interest by applying a coal exit policy to all of its portfolios.
9. Divesting companies with fossil fuel exposure would send a strong public message that Vanguard does not wish to invest in industries that are environmentally destructive.