As ESG investing continues to grow, the world’s biggest asset managers are increasingly hitting headlines as they are frequently pulled up on their voting records on ESG issues, policies and products in the area. Vanguard – as the world’s second-largest asset manager with total global assets under management of more than $8.1trn as of 31 January – is of course among them. But should a firm be criticised for things it never set out to do?

ESG Clarity recently visited Vanguard’s headquarters in Pennsylvania and spoke with John Galloway (pictured, left), global head of investment stewardship, and Matt Piro (pictured, right), global head of ESG strategy, to find out more about the firm’s approach to ESG. Although the firm considers ESG risk as it impacts value, has clear principles for engagement and has developed ESG products to meet client demand, the pair say its ultimate mandate is to serve the often-varying needs of its 30 million global investors.

“We have no agenda beyond shareholder return,” Galloway says. “That frustrates those who say, ‘How can you say that? Climate change today is an essential crisis, and everyone should be doing everything they can.’ There’s a frustration with lack of governmental action, particularly in the States, and therefore a desire for other entities to step in and do something. We don’t believe that’s the role we can or should play. We are not a solution to a societal challenge that needs governmental action.”

Vanguard runs its broad-based index products alongside its ESG-labeled products. ESG risks, as material risks, are still considered across the board, however, Piro says.

In terms of its ESG products the firm currently offers the Vanguard SustainableLife, sub-advised by Wellington Management, and the actively managed Vanguard Global Sustainable Equity Fund in the UK, as well as a range of exclusionary ESG index funds and ETFs worldwide.

“We have a set of exclusionary ESG products and we’re very clear what’s in it and what’s not,” Piro adds. “Will that particular product suit the needs of all our clients? No. We’re trying to understand how to approach such a deeply personal issue [as people’s ESG-related values] as a provider of a pooled product, a product designed, by definition, for the many.”  

“Expect to see more from us globally,” Piro says in reference to the active impact fund set to be brought forward in the US over the summer. “But I think there will remain a very high level of demand for those broad-based products.”

Voting and engagement

Having no agenda beyond returns also means the firm will not take a blanket view on ESG shareholder proposals. Its principles are governance-based, and where these intersect with ESG concerns – such as board diversity, executive pay and board expertise to understand developing issues such as cybersecurity and climate change – it can be said to consider ESG. But it takes a case-by-case approach.

Sometimes this means the firm can look like it’s ahead on ESG issues – when it’s identified something as a material risk before it becomes labelled as “ESG”. For example, Galloway says around seven years ago Vanguard was one of the first asset managers to send a clear signal in terms of its concerns regarding the lack of gender diversity on boards.

“We’d seen the research, we’d done the engagements with our portfolio companies, and we’d seen better-performing companies have more diversity on their boards. And we saw the risks from the failures or lack of diverse board composition. Over time, as clarity around the risk grows and the data is increasing, the market expectations and the market norms make it a little self-reinforcing, because you start to see companies doing something. So then the risk goes up if there’s added reputational or regulatory risk, and so we ramp up our expectation accordingly.”

But at other times, waiting for risks to be priced into the market can make the firm look behind the times. On climate, for example, it will not require emissions reductions targets from companies, because it does not look to dictate company strategy. Although it is a member of the Net Zero Asset Managers’ initiative, this does not require the firm to set targets for all assets under management, just those “managed in line with the attainment of net-zero emissions”.

“What we’re looking for is companies to provide us and other investors with an understanding of how they’re assessing the risks, how they’re mitigating them and how they’re disclosing their progress against those targets they’ve set, so the market can be priced in,” Galloway says. And if a company strategy that sets no reduction targets turns out not to be good? “If they have a non-viable strategy, the market will judge that,” he explains.

This can be frustrating for those who see the potential influence the “big three” asset management firms – BlackRock, Vanguard and State Street – which cast more than 25% of votes at corporate shareholder meetings, especially when they collectively own more than a quarter of shares in fossil fuel giants. But Vanguard is clear on its business model, its aims and meeting its mandate. Where it might hope to influence these areas is instead in its engagements.

See also: – Vanguard Q&A: Empowering shareholders

Galloway has been at Vanguard for about five years, heading up a team of more than 60 people. Last year, they engaged with more than 1,000 companies, of which Galloway says he does around five a week himself.

So far, the success of these has been anecdotal, he says. “We haven’t figured out a way to measure this.”

For example, he says: “I was recently on a call with a large US pharmaceutical, and at the end of the call their lead independent director said, ‘The engagements we’ve had with Vanguard across three to four years have been incredibly helpful in how we navigated our response to the opioid crisis. You encouraged us to set up an independent committee of the board, provide better disclosure around the impact of our compensation plans, and we are grateful for the push you gave us.’”

ESG is evolving, and with its engagement and products, so is Vanguard. But at its core, its commitment to shareholder return remains the same.