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An open letter from the CEO stresses the firm’s focus on the long-term, bottom-line impact of these factors on its investments

By James Langton |

Valley Forge, Penn.-based asset-management giant Vanguard Group Inc. reports that it's increasingly concerned about, and focused on, climate risk and board diversity at the companies it invests in.

Vanguard CEO Bill McNabb issued an open letter to public companies this week setting out the firm's approach to investment stewardship, which is "an increasingly important area of focus" for the firm given its significant ownership stakes through both its index and active funds. Vanguard manages US$4.5 trillion in assets globally as of July 31.

McNabb's letter stresses that the firm's focus is the long-term, bottom-line impact of factors such as the gender composition of corporate boards and the significance of climate change: "We believe that well-governed companies are more likely to perform well over the long run."

In particular, "Gender diversity is one element of board composition that we will continue to focus on over the coming years. We expect boards to focus on it as well, and their demonstration of meaningful progress over time will inform our engagement and voting going forward."

The letter notes that there is "compelling evidence" that companies with more diverse boards outperform companies with boards that are less diverse.

"Diverse boards also more effectively demonstrate governance best practices that we believe lead to long-term shareholder value," McNabb's letter says. "Our stance on this issue is, therefore, an economic imperative, not an ideological choice."

Similarly, the firm highlights its growing concern about the financial impact of climate change.

"Climate risk is an example of a slowly developing and highly uncertain risk — the kind that tests the strength of a board's oversight and risk governance," McNabb's letter says. "Our evolving position on climate risk (much like our stance on gender diversity) is based on the economic bottom line for Vanguard investors. As significant long-term owners of many companies in industries vulnerable to climate risk, Vanguard investors have substantial value at stake."

With that in mind, it calls on boards, management, and investors, "to embrace the disclosure of sustainability risks that bear on a company's long-term value creation prospects."

"… our increased focus on climate risk and gender diversity are not fleeting priorities for Vanguard. As essentially permanent owners of the companies you lead, we have a special obligation to be engaged stewards actively focused on the long term," it says.

At the same time, Vanguard's investment stewardship group released its annual report today, which sets out the results of its proxy voting and corporate engagement efforts over the past year.

"You can expect us to speak out to serve as a voice for our clients, and to protect and further their economic interests," said Glenn Booraem, Vanguard's investment stewardship officer. "We continue to address traditional governance issues, such as misaligned compensation practices, unequal shareholder voting rights, and ineffective boards, and increasingly, we've taken stronger positions on emerging topics, including gender diversity on boards and climate risk disclosure."