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Vanguard names climate risk as defining investment theme

It's the clearest signal yet that investors are scrutinizing high-carbon firms far more closely.

You'll be forgiven for missing it. You may have been enjoying what now seems to have been the last gasp of summer — having a long weekend on the beach or snatching the last couple of days with the children before they headed back to school.

But late last week, as offices across the country stood quiet, came the clearest sign yet that the global investment community is waking up to smell the, ahem, climate risk coffee.

The Vanguard Group, a major American investment management company, revealed details of its voting record for the last six months — details which showed that the firm, for the first time, defied management to vote in favor of enhanced climate disclosures in a number of key shareholder votes, including at oil giant ExxonMobil.

Vanguard said the voting record reflects its intention to take more "public positions on select governance topics," naming climate risk and gender diversity as the two defining themes of its investment approach in the coming years.  

It's hard to overstate the financial muscle of Vanguard and what this move towards a more progressive climate stance could spell. It boasts more than $4.4 trillion in assets under management. It owns at least 5 percent of 468 components of the S&P 500. As of May, it was the world's second-largest fund company, beaten only by BlackRock.

A warning from Vanguard that climate risk is now one of its top priorities should make board members at companies of all stripes sit up and take notice. The firm holds much of its assets in large index-tracking funds and views itself as a de facto permanent investor in the world's largest companies, a situation that has made it traditionally cautious of public spats with board management, preferring to try to nudge company governance in public.

Regardless of one's perspective on climate, there's no doubt that changes in global regulation, energy consumption and consumer preferences will have a significant economic impact.

A public vote against management on any issue, let alone climate change, carries serious heft from a firm such as Vanguard — more so than an activist investor, however large. Not least because in many cases — including Exxon — it owns enough of the company to hold the deciding vote.

In the United States, where Vanguard is based, climate is a politically and ideologically divisive topic. But Vanguard is at pains to stress the increased focus is not for political or ideological reasons, but because it threatens the long-term economic value of a company. "Regardless of one's perspective on climate, there's no doubt that changes in global regulation, energy consumption and consumer preferences will have a significant economic impact on companies, particularly in the energy, industrial and utilities sectors," said Glenn Booraem, Vanguard's investment stewardship officer.

That was backed up by fresh warnings from fellow investment giant Schroders, which this week warned industries such as construction, steel and commodity chemicals could see up to 80 percent of their profits wiped out if carbon prices rise to the levels needed to hit Paris Agreement goals.

Vanguard's stance follows similar positions outlined in recent months by its investment rivals, in what is emerging as a major shift of asset managers in favor of greater disclosure. Investment giant BlackRock offered explicit warnings to companies earlier this year that it will vote against management if its concerns over climate risk are consistently ignored.

Aviva revealed to BusinessGreen back in November that it will vote against reports issued by high-carbon firms that fail to apply the climate risk disclosure guidance at their annual meetings.

And while the work of the Financial Stability Board's Task Force on Climate Risk (TCFD) is not explicitly mentioned by Vanguard, Booraem makes clear in its Investment Stewardship annual report that greater transparency is urgently needed to correct potential market failures on this topic.

"Our concern is fundamentally that in the absence of clear disclosure and informed board oversight, the market lacks insight into the material risks of investing in that firm," he said. "It's of paramount importance to us that the market is able to reflect risk and opportunity in stock prices, particularly for our index funds, which don't get to select the stocks they own."

Vanguard makes it clear its fresh focus on climate risk will not mean an end to its preference for more private engagement, but it does spell the end of the road for companies that fail to listen and take action to their concerns. And faced with not just Vanguard, but also fellow asset managers such as BlackRock and Aviva all adopting similar stances, it soon may be untenable for companies to refuse climate disclosure proposals from shareholders out of hand, even without the TCFD's voluntary guidelines adopted by governments as mandatory requirements.

A new dawn is breaking on the investment world as firm by firm, asset managers accept the real, credible threat of climate risk to the financial system. For board executives, it's time to put down the holiday reading and start work on the climate risk factors threatening future profits — before investors force the issue.

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