Vanguard’s quarter-trillion in fossil fuel investments

Vanguard is one of the world’s largest asset managers, handling the retirement savings of millions of Americans. Its mission is to help people save for the future. At the same time, it’s playing a major role directing billions in funding to carbon polluters — companies maintaining and expanding the fossil fuel infrastructure that threatens to make the future uninhabitable.Fossil fuel stock prices are based on oil reserves that will not actually be burnable if we expect to avoid catastrophic effects due to climate change. Countries are already moving to restrict emissions and transition to clean energy alternatives. Money invested in fossil fuel infrastructure is likely to become ‘stranded assets’….Vanguard is behind the curve with only one socially responsible portfolio. That’s the Vanguard FTSE Social Index Fund, and with holdings in ConocoPhillips, Kinder Morgan, and other large oil companies, it’s hardly fossil free. But it’s the only mutual fund Vanguard offers with a responsible investing mandate.

Source: Vanguard’s quarter-trillion in fossil fuel investments

Mark Gilbert Has Forgotten the Meaning of Capitalism

On Bloomberg, Mark Gilbert asks:

Should the investment arm of one sovereign nation be using its financial muscle to influence salary policies in other sovereign nations, setting principles which then guide how it votes in particular examples?

It isn’t surprising that he gets the wrong answer, calling the sovereign wealth fund’s votes against excessive compensation “mission creep.” He’s asking the wrong question. It should be: “Should a major shareholders who is a sophisticated institutional investor have the right to exercise its independent judgement on matters legally required to be put to a shareholder vote?”

The answer is yes. That is what capitalism means. A provider of capital has certain rights granted to ensure confidence in the markets through transparency, accountability, and structural limits on conflicts of interest. To put it another way, who is in a better position to evaluate CEO pay, the board members selected by, paid by, and informed by the CEO him or herself or a fiduciary shareholder obligated to deploy its resources to maximize returns for its beneficial owners?

Gilbert presents no evidence that these actions are taken for any reason other than the creation of shareholder value, a case he cannot make for the design of most CEO pay plans. On the contrary, he quotes the fund’s policy approvingly, noting that

it would back remuneration policies that are “driven by long-term value creation and aligns CEO and shareholder interests.” Pay packages should be transparent, pension entitlements should be only “a minor part” of total packages, while a “substantial proportion” should be in the form of equity that’s locked in for “at least five and preferably 10 years.”

His objection is Norges’ conclusion that its efforts should “moderate pay levels in the longer term.” Of course, he has no basis for arguing that this goal, even if achieved, would be anything other than beneficial to shareholders.

Center for Political Accountability: Rise in Mutual Fund Support for Shareholder Resolutions on Political Contributions

The Center for Political Accountability reports that mutual funds are increasing their support for shareholder resolutions calling for companies to disclose information about their political contributions.

Support by mutual funds for the Center for Political Accountability’s corporate political disclosure resolution jumped significantly in 2017, to 48 percent from 43 percent in 2016, according to an analysis by Fund Votes.

The analysis also found that abstentions decreased from five percent to three percent, indicating a shift toward more active support for political
transparency in the first year of Donald Trump’s presidency….Among 20 of the 23 largest asset managers globally, average support for the CPA model
resolution was 37.3 percent, based on 22 resolutions filed. This represents an increase of more than six percentage points from 2016 when average support was 31.1 percent, based on 27 resolutions filed. In addition, more fund groups participated in voting on the resolutions with abstentions decreasing by an average of eight percentage points from 11.5 to 3.4 percent.

As has been the case in previous years, the biggest fund groups remained the biggest laggards. Vanguard, Fidelity, BlackRock and American Funds continued a nearly unbroken record of voting against or abstaining on corporate election spending disclosure resolutions. Average shareholder support also dropped slightly from 33 percent in 2016 to 30 percent in 2017.

FT: Investors pass the buck on governance VEA: No They Don’t

Rana Foroohar’s column on institutional investors and corporate governance is internally inconsistent and factually wrong. She says that institutional investors “outsource” their proxy votes to the proxy advisory firms. But anyone who understands finance and markets has to recognize that (1) institutional investors rely on a wide range of sources for making all investment decisions, including proxy voting, and that they make decisions about the sources they rely on based entirely on their assessment of value, (2) the data show that institutional investors like the analysis of the proxy advisory firms but often depart from their recommendations, especially on complex and controversial votes like proxy contests and business combinations, and (3) the votes she focuses on, regarding CEO pay, are advisory only and can be disregarded by the board

In other words, even if they do “outsource” their fiduciary obligation (no evidence this is the case), the vote is not binding on the company, which can ignore it.

She writes:

Consider the recent saga of Credit Suisse. Over the past couple of years, the company has been trying to orchestrate a turnround, settling a big fine over dicey (pre-financial crisis) mortgage-backed-security deals with the Department of Justice, offloading bad assets and restructuring the business. None of this is good for share price in the short term, but it was necessary. No surprise, then, that the Credit Suisse management team was disappointed when proxy advisers opposed its corporate pay plan, citing 2016 losses, despite the fact that the top brass took a 40 per cent cut in its own compensation as part of the turnaround effort. “It was just totally demotivating for staff and management,” says one insider. “We could have left these decisions for someone else to worry about later and there would have been no issue over pay.”

ISS stands by its recommendation, and adds that it does take into account other performance metrics, like return on invested assets, revenue growth, and so on. But TSR is “what investors want to see,” says Patrick McGurn, special counsel at ISS, and therefore determines a yes-or-no vote on pay. “We’ve talked to our clients about using non-financial performance to judge pay, but they want something quantifiable. You can’t just have some vague judgment about it.”

A couple of points here. First, Foroohar completely undercut her own argument by showing that it is the institutional investors and proxy advisory service clients who tell ISS what to do, not the other way around. Second, if, indeed, the turnaround will provide benefits to investors, that is when the benefits should be realized by the employees as well, and there are pay plans that provide all the right incentives to do so.

Source: Investors pass the buck on governance

Tim Smith on Conflicts and Opportunities in Mutual Fund Proxy Votes: Progress at Vanguard

VEA Vice Chair Nell Minow interviewed Walden’s Tim Smith for the Huffington Post:

I’ve written earlier pieces about the failure of the people who manage our money, especially our retirement savings to provide essential feedback to the companies whose stock they buy on behalf of more than 40 percent of working Americans, charging us as many as 16 undisclosed fees and usually voting against shareholder initiatives on improving board, increasing the link between CEO pay and performance, and making better disclosures on climate change, cybersecurity, diversity, and other issues relating to investment risk and corporate reputation. There’s been a little bit of progress at Vanguard, one of the most powerful and influential money managers, with more than three TRILLION dollars invested, so I asked one of the most thoughtful leaders in this field, Tim Smith of Walden Asset Management, some questions about why that is important and what it means.

 

How much stock in big American companies is controlled by these firms?  How much money is involved?

These are massive investment firms. BlackRock has over $5 trillion dollars in Assets they are managing and Vanguard approximately $3.5 trillion. The raw size of their holdings results in having tremendous power with the companies they own. Most firms that have outreach to their primary investors always make sure to arrange visits with Vanguard and BlackRock as a necessary stop.

 

Why does it matter how they vote on topics like climate change and disclosure of political contributions when even a 100 percent vote is advisory only and does not require the company do  anything?

 

Shareholder resolutions filed on social and environmental issues have a 45 year history as investors raise important environmental , employee relations, human rights, workplace health and safety issues among others. These resolutions and the engagements that accompany them have had a significant long-term impact on company policies and practices. There are literally hundreds and hundreds of examples of companies responding positively to investor input by

* expanding their corporate disclosure for investors and the public

* changing their policies, practices, and behavior

* updating governance policy

*taking forward-looking steps on an issue like climate change

*making sure hazardous products are removed from food or a production process influencing workers.

*adding diverse candidates to the Board

And the list goes on. Whether a shareholder resolution is binding or not seems immaterial . Companies often see these issues as affecting their reputation and their credibility with investors or consumers as well as affecting them financially over time. Thus many companies take action stimulated by the case being made by investors — but also by their own sense of how acting in a responsible way is good for their business and long term shareholder value.

 

So how investors vote is vitally important because it is a clear indicator of how a company’s shareowners feel about an issue. To blindly vote for management in virtually all cases not only distances the investor from important decisions that affect them financially but is far from acting as a “responsible fiduciary.” In short, it definitely matters how they vote your shares!

 

Every mutual fund company files a form NPX each August disclosing how they vote. So there is a public record. In addition Ceres, the environmental organization, summarizes how funds vote on climate related issues, a good indicator of an investment firm’s voting stance. You can see which funds vote for climate resolutions 0 percent of the time or 15 percent or over 50 percent.

 

What have you been doing to try to get Vanguard and Blackrock to be more transparent and engaged in share ownership rights like proxy voting?

 

Over the last several years companies like BlackRock and Vanguard which had a consistent record of voting against all social and environmental resolutions faced growing pressure from clients and investors. In addition, media attention compared them unfavorably to companies like State Street which showed real forward progress in proxy voting. In addition, PRI expects its members to demonstrate seriousness in being an “active owner.”

 

Walden Asset Management, where I serve as Director of ESG Shareowner Engagement, led a shareholder resolution to both companies and was joined by other investors  as cofilers. This prompted both companies to sit down with us to see if we could come to an agreement allowing the resolution to be withdrawn before the vote. As I said, even non-binding shareholder proposals can have an impact.

 

Both discussions were productive, leading to agreements, and both companies disclosed their new thinking about proxy voting on their websites, highlighting their deep concern about climate risk and their strong support for diversity on boards of directors.

 

What does this latest statement from Vanguard signify?  Does it go far enough?

 

These are important steps forward by two of the world’s largest investment managers. Their engagements with companies send a strong message to executives that it is necessary to address and urgently  act on climate change, for example. But their voting record is still at the bottom of the ladder. They voted for two resolutions, at ExxonMobil(62.3 percent shareholder support) and Occidental (67 percent shareholder support) but they voted no on dozens of other climate-related resolutions. It’s a start but still demonstrates a very modest voting record. Pressure will doubtlessly mount on these two giants to match their rhetoric with actual votes pressing companies to move with some sense of urgency on key environmental and social issues.

 

What more would you like money management firms like Vanguard and Blackrock to do?

 

Vote more aggressively, be transparent about what is put on the table in their meetings with companies (no need to mention companies by name), join other investors in speaking out on key environmental/social/governance issues affecting companies financially, meet with shareholder resolution proponents to better understand their positions, speak publicly about the value of the shareholder resolution process, and make sure will not be eradicated by proposals by led by the Business RoundTable or Chamber of Commerce.

‘No President in the U.S.’ Leads $53 Billion Fund to Sell Stocks – Bloomberg

A leadership vacuum in the world’s biggest economy has driven the largest private-sector pension fund in Finland to cut the weight of U.S. stocks in its 45 billion-euro ($53 billion) portfolio.

“It seems as if there is no president in the U.S.,” Risto Murto, chief executive officer of Varma Mutual Pension Insurance Co., said in an interview in Helsinki on Wednesday. “If I look at what is the moral and practical power, there is no longer a traditional president.”

Source: ‘No President in the U.S.’ Leads $53 Billion Fund to Sell Stocks – Bloomberg

What Slate’s Money Podcast Missed About ESG/Impact Investing

It really hurts to do this because I have nothing but admiration for all these guys and they get huge bonus points for a completely hilarious title for this episode. But holy moly did they get it wrong. Here’s their description:

Felix Salmon, senior strategy officer at a political risk startup, Anna Szymanski, Slate Moneybox columnist Jordan Weissmann, and Julia Shin—vice president and managing director of Impact Investing at Enterprise Community Partners—discuss:

the disbanding of Trump’s CEO council

companies’ responsibilities to their shareholders

impact investing

Here’s what they missed, very, very briefly:

Perhaps they think that their audience is primarily made up of the tiny fraction of Americans who sit at home and make individual stock picks. That’s not very likely; they’re over at Motley Fool. Most individuals, as the people on this podcast know very well, invest via mutual funds and pension funds. The story they should be looking at, which they touch on very briefly, is the evolving role of large institutional investors, like Blackrock, in the area they call “impact investing” or ESG, and, just as important, the way that evolving role reflects a more sophisticated understanding of metrics and indicators that are just as quantifiable and just as important for evaluating risk and return as too-easily manipulated traditional metrics like EPS and PE ratios. Both of these points are absolutely fundamental, but most of this podcast skirts those issues by accepting outdated notions about trade-offs between financial gain and investing to warm the cockles of the heart.

I won’t reiterate the extensive writing we have done on those issues, which we will continue to explore even more extensively in the future, I’m sure. We hope some day Slate will, too.

Source: The CEO council disbanding, companies’ responsibilities to shareholders, and impact investing.

Vanguard seeks corporate disclosure on risks from climate change

Vanguard Group on Monday said it has urged companies to disclose how climate change could affect their business and asset valuations, reflecting how the environment has become a priority for the investment industry.

Under pressure from investors, Vanguard and other fund companies have pushed to pass several high-profile shareholder resolutions on climate risk at big energy firms like Exxon Mobil Corp and Occidental Petroleum Corp during the spring proxy season.Vanguard manages about $4 trillion and is often the top shareholder in big U.S. corporations through its massive index funds – giving it a major voice in setting corporate agendas.

Vanguard, the biggest U.S. mutual fund firm by assets, had not supported climate activists on similar measures. But Glenn Booraem, Vanguard’s investment stewardship officer, said in a telephone interview on Monday the issue as well as shareholder proposals have evolved.

Source: Vanguard seeks corporate disclosure on risks from climate change

Campaign urges U.S. public pension funds to divest from owner of Trump hotel

Advocacy groups launched petitions and sent letters on Wednesday urging two of the biggest U.S. public pension funds to divest from an investment fund unless it stops paying one of President Donald Trump’s companies to run a New York hotel.<P><P>Reuters reported on April 26 that public pension funds in at least seven U.S. states periodically send millions of dollars to an investment fund that owns the upscale Trump SoHo Hotel and Condominium in New York City and pays a Trump company to run it, according to a Reuters review of public records.

Source: Campaign urges U.S. public pension funds to divest from owner of Trump hotel

World’s biggest pension fund goes gender equal for the WIN – Financial News

Japan’s $1.2tn Government Pension Investment Fund is forging ahead with its gender equality drive, picking MSCI’s “Empowering Women” WIN index to benchmark its progress.

The giant fund has begun by shifting about 3% of its passive domestic equity investments, or around one trillion Japanese yen ($8.8bn), into index funds tracking three socially-responsible benchmarks, it said today.

One of these, MSCI’s Japan WIN index tracks companies that “encourage more women to enter or return to the workforce”. It ranks companies according to the gender balance of their new recruits, current workforce, senior management and executive board.

The other two indices it picked today – MSCI’s Environmental, Social and Governance Select Leaders and the FTSE Blossom Japan index – track Japanese firms that perform well on a more general social-responsibility agenda.

Source: World’s biggest pension fund goes gender equal for the WIN – Financial News