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March 8, 2023

Investors accuse Vanguard of violating fiduciary duty over climate risk

Vanguard logo on smartphone
(Photo: Rafael Henrique/Dreamstime)

More than 1,400 Vanguard clients have written to urge the asset manager to improve its engagement and prioritise decarbonisation in its proxy voting.

Vanguard has been warned that it could face a class action lawsuit, after more than 1,400 clients accused the asset manager of violating its fiduciary duties.

In a letter sent to Vanguard that has been published by US campaigning group Sierra Club, the asset manager was told that it is violating its duties of care and loyalty to clients. The letter called on the company to escalate its engagement and improve its proxy voting, asking it also to change its investment priorities to “adopt and apply rigorous climate risk criteria and analysis across its entire portfolio”.

According to Susan Gary, professor emerita of law at the University of Oregon, “Vanguard should be concerned that if it is in breach of these fiduciary responsibilities, its customers could have grounds for a class action suit”. 

Vanguard, which is one of the world’s biggest asset managers, has been criticised by various campaigners over its approach to environmental, social and governance factors. It was one of several industry giants that scored poorly on a recent ShareAction survey, which found that most managers were failing to invest to protect the “climate, biodiversity and people”.

Vanguard was also slammed in January by the Reclaim Finance group after it withdrew from the Net Zero Asset Managers initiative in December 2022, a commitment that Reclaim described as “effectively meaningless”.

While peers BlackRock and State Street Global Advisors have previously been criticised for their limited ESG efforts, the letter – which was drafted by Sierra Club director and Vanguard customer Paul Rissman – praised both for their engagement with boards, in contrast with Vanguard.

Both “annually use their voices to forcefully set expectations for boards as they enter into a net zero transition, but Vanguard remains silent”, the letter said. Rissman also noted BlackRock and State Street were members of the Climate Action 100+ group, of which Vanguard is not a part.

Call for improvements

“Despite claiming that the ‘most visible sign of Vanguard’s engaged ownership is our funds’ proxy voting at portfolio company shareholder meetings’, Vanguard has one of the worst records of voting for shareholder climate resolutions of any firm in the industry,” the letter stated.

It called on Vanguard to adopt investment stewardship guidelines that prioritise decarbonisation “in line with a 1.5C pathway”. The asset manager was also asked to communicate the industry standards that are used to assess portfolios.

Besides adopting more stringent climate risk criteria, Vanguard was told to “expand offerings that are 1.5C-aligned and provide investment products that are on a zero emissions pathway”.

“Asset managers like Vanguard have legal responsibilities to their customers. They act as fiduciaries, so they are governed by the duties of care, loyalty, and impartiality,” Gary said. “Vanguard has said climate change is a material risk to their clients’ investments, so it would follow that Vanguard should do what it can to mitigate that material risk.

“If Vanguard fails to address material risk, it may be violating its duty of care to its customers,” she added. “If Vanguard is putting its own interests above its customers’ interests, it could be violating the duty of loyalty. And if Vanguard is preferencing one set of customers over another, it could be violating its duty of impartiality.” 

A Vanguard spokesperson said: “As an investor-owned asset manager, Vanguard is singularly focused on maximising our clients’ returns and giving them the best chance for investment success. As we’ve long maintained, we consider climate change to be a material risk to companies and their shareholders, and are committed to continuing to help our investors navigate its impact on their long-term financial success.”

Georgia Stewart, CEO at stewardship platform Tumelo, said: “This situation underscores the complexities of investment stewardship today, and the challenges fund managers face.”

Tumelo provides ‘pass-through voting’, which “allows investors in pooled funds to vote their shares in proportion to the assets they have invested” and “removes fund managers from having to make controversial voting decisions”.

“It still empowers fund managers to override any pass-through votes on decisions that affect their ability to meet their fiduciary duty,” she added.

A service from the Financial Times