Dive Brief:
- Over 8,000 individual clients wrote to new Vanguard CEO Salim Ramji Thursday, urging him to put climate risk at “the forefront” of the investment firm’s risk management strategies.
- The letter, published by environmental nonprofit Sierra Club, asked Ramji to “steer Vanguard in a new direction,” as clients believe the nation’s second-largest asset manager has “fallen far behind in terms of managing and mitigating systemic risks like climate change.”
- Ramji officially took over as CEO and chair of the board on July 8, following former CEO Tim Buckley’s announced retirement. Vanguard supported just 2% of environmental and social-related shareholder proposals in the 2023 season, and experts pointed to the firm and BlackRock’s falling support for such proposals as a driving factor behind declining ESG approval rates at the beginning of the year.
Dive Insight:
In total, 8,056 individual clients signed onto the letter, a 686-page document which listed each signatory, a number of which also sent individual comments to Vanguard’s new CEO.
Ramji took the reins after spending more than a decade each at BlackRock and McKinsey & Company, most recently as the former’s global head of iShares and index investments, according to his LinkedIn profile.
Vanguard primarily utilizes an index investment strategy, which the signatories said are “disproportionately exposed to the systemic risks of climate change” due to their long-term broadly diversified nature. The letter urges Ramji to take on the task of adopting to and better mitigating climate risks in Vanguard’s portfolios seriously.
“As a fiduciary, it is your duty to steward your clients’ investments — including my investments — responsibly,” the letter said. “Failing to do what is in your control to mitigate risks to your clients’ assets is arguably a violation of your legal obligations.”
The clients said due to the investment firm’s status as one of the largest asset managers, it is well positioned to make the changes and put itself “at the vanguard of investors responsibly managing for — and working to mitigate — systemic risks.” However, that will require a change in the investment and stewardship approaches it takes to proxy voting, engaging with companies, working with clients and fund offerings, per the letter.
The signatories said they believe Vanguard failed to properly mitigate climate risks under Buckley’s tenure. Making the necessary shift in strategy, per the letter, will require the firm to reckon with the systemic risks of climate change, as well as those posed by biodiversity loss, artificial intelligence and economic inequality. Vanguard has previously projected that “in all scenarios, climate change will have a negative estimated net impact” on the global economy, with BlackRock estimating a potential cumulative loss of 25% of the global output over the next two decades.
“Meeting the challenges of the 21st century requires moving away from 20th century thinking about investment risk management; it requires understanding the risks that climate change poses to both individual companies and portfolios as a whole, having a strategy to manage and mitigate those risks in long-term and passively managed funds, developing a vision to navigate a set of new and evolving risks, and having a team that is eager and able to meet these challenges,” the letter said.
Last month, Vanguard defended its decision to back ExxonMobil’s board of directors and CEO Darren Woods for re-election as the oil giant waged legal action against a pair of activist investors over a climate-related shareholder proposal. State finance officials — including the California Public Employees’ Retirement System — had publicly opposed the re-election due to Exxon’s lawsuit against Arjuna Capital and Follow This.
While Vanguard said the since-dismissed lawsuit had given it “some pause given the potential chilling effect on future shareholder proposals,” it had not seen any evidence of the board’s actions negatively impacting shareholder returns.
Vanguard said it “would have concerns if a company leveraged its resources to pursue such legal cases with the intent of chilling the shareholder process more generally,” but believed Exxon had made a “compelling argument” for why the lawsuit was in the interest of shareholders.
