Climate change, and the ongoing global response, will have far-reaching economic consequences for companies, financial markets, and investors.
Vanguard serves more than 50 million individual investors who have chosen to entrust us with their savings. It’s a responsibility we take seriously. Vanguard is committed to understanding and attending to material risks that can erode our investors’ long-term returns, including climate-related risks. In this article, we provide an overview of Vanguard’s approach to material climate risk.
Vanguard has been conducting research to understand how climate change could affect the global economy. In a 2022 Vanguard Megatrends research paper, The Economics of Climate Change, Vanguard economists used consensus scientific data to assess the impact of climate change on economic activity under four scenarios for greenhouse gas emissions and resulting temperature increases. They found that the net impact on global GDP is negative in all scenarios.
We aim to provide investors with the insights they need to make well-informed investment decisions and to understand material climate risks and opportunities. Our global investment product lineup includes more than 280 index mutual funds and ETFs and more than 120 actively managed funds and ETFs. For clients who seek them, we offer more than 30 investment products globally that have specific environmental, social, and governance (ESG) objectives. For investors who specifically want to limit exposure to carbon-intensive industries, we offer ESG index funds that avoid or reduce exposure to such industries while seeking to achieve a broad market-like return.
Vanguard also offers actively managed ESG funds that seek to generate excess return by allocating capital toward companies that the fund managers may deem as demonstrating leading ESG practices consistent with each fund’s mandate. Although the investment methodology may vary by product and manager, assessing ESG-related risks and opportunities is central to the investment strategy of each of these actively managed ESG portfolios.
Vanguard’s Investment Stewardship program is responsible for voting proxies and engaging with company boards and management teams on behalf of Vanguard-advised funds.1 As part of its work, the Investment Stewardship team seeks to understand how boards of directors oversee material risks, including material climate-related risks, to safeguard long-term investor returns. For portfolio companies where climate risk is a material risk, the Investment Stewardship team may engage with them to understand how they disclose, oversee, and mitigate these risks.
Companies’ disclosure of material financial risks is central to the accurate pricing of securities and the fair and efficient functioning of the capital markets. Efficient market functioning is particularly important for the index funds favored by many Vanguard investors since these funds buy and hold the many securities included in the benchmark index.
Proxy voting and related portfolio company engagement for funds that are managed externally by third-party investment advisors, including Vanguard’s actively managed equity funds, are handled by these external investment advisors.
Vanguard works with global policymakers to support the interests of long-term investors. Government leaders are specifically empowered and charged with considering the competing interests inherent in issues—including climate change—and crafting public policy responses that will address the complex societal impacts and trade-offs. Given the potential impact of climate change on the global economy and investor returns, it is important that policymakers provide clarity to individuals, companies, and the financial markets about government plans and targets to address climate risks.
Vanguard has a set of corporate sustainability goals and initiatives to make progress toward reducing carbon emissions and reaching carbon neutrality in our global operations by 2025. We will continue to report on progress against our corporate sustainability strategy.
Vanguard is committed to helping our investors navigate the material risks, including material climate risk, to their long-term returns, and to doing so in a way that is grounded in our deep commitment to our investors and their financial well-being. To this end, we will publicly report on our efforts with respect to climate risk, including through our annual reporting in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures.
1 Vanguard’s Investment Stewardship program is responsible for proxy voting and portfolio company engagement on behalf of the quantitative and index equity portfolios advised by Vanguard (together, “Vanguard-advised funds”). Vanguard’s externally managed portfolios are managed by unaffiliated third-party investment advisors, and proxy voting and engagement for those portfolios are conducted by their respective advisors.
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ESG funds are subject to ESG investment risk, which is the chance that the stocks or bonds screened by the index provider or advisor, as applicable, for ESG criteria generally will underperform the market as a whole or, in the aggregate, will trail returns of other funds screened for ESG criteria. The index provider or advisor’s assessment of a company, based on the company’s level of involvement in a particular industry or their own ESG criteria, may differ from that of other funds or an investor’s assessment of such company. As a result, the companies deemed eligible by the index provider or advisor may not reflect the beliefs and values of any particular investor and may not exhibit positive or favorable ESG characteristics. The evaluation of companies for ESG screening or integration is dependent on the timely and accurate reporting of ESG data by the companies. Successful application of the screens will depend on the index provider or advisor's proper identification and analysis of ESG data. The advisor may not be successful in assessing and identifying companies that have or will have a positive impact or support a given position. In some circumstances, companies could ultimately have a negative or no impact or support of a given position.