Climate change, and the ongoing global response, will have far-reaching economic consequences for companies, financial markets, and investors.
Vanguard serves tens of millions of 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.
Research on the market and economic implications of climate change
Vanguard has been doing research to understand how climate change could affect the global economy and financial markets in the coming decades. For example, in a recent 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 continue to pursue research efforts such as this to educate our clients about the ways climate change may affect economic growth and the value of their investments over the long term.
Information and choices for our investors
We aim to provide investors with the insights they need to make well-informed investment decisions and to understand material climate risks and opportunities. We also offer a broad range of investment products to choose from, spanning more than 280 index mutual funds and ETFs and more than 120 actively managed funds and ETFs, globally. For those clients who seek them, we offer investment products with specific environmental, social, and governance (ESG) objectives that can help investors manage these risks and opportunities, including several ESG funds that are designed to meet net zero objectives. For investors who specifically want to limit exposure to carbon-intensive industries, we offer ESG index funds that avoid or reduce exposure to specific industries while seeking to achieve a 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 environmental, social, or governance practices consistent with each fund’s ESG mandate. Although the investment methodology may vary by product and manager, for these portfolios, assessing ESG-related risks and opportunities is central to the investment strategy.
Investment stewardship
More than 25 asset management firms, including Vanguard, serve as investment managers and investment stewards for Vanguard funds. Vanguard’s Investment Stewardship program is responsible for the administration of proxy voting and engaging with company boards and management teams on behalf of Vanguard’s internally managed equity funds to understand how companies manage their material risks. For portfolio companies where climate risk is a material risk, the Investment Stewardship program engages with them to understand how they disclose, address, and oversee this risk given the potential harm to long-term shareholder value. 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.
Engagement with policymakers
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 such as climate change and crafting public policy responses that will address the complex societal impacts and tradeoffs. Given the potential impact of climate change on the global economy and investor returns, it is important that policymakers set long-term expectations to provide clarity to individuals, companies, and the financial markets about government plans and targets to address climate risks.
Corporate goals and initiatives
Vanguard has a set of corporate goals and initiatives to make progress toward reducing carbon emissions in our global operations and reaching carbon neutrality as a company by 2025. We will continue to report on progress against our corporate sustainability strategy.
Looking ahead
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.
For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
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All investing is subject to risk, including the possible loss of the money you invest.
Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Diversification does not ensure a profit or protect against a loss.
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.