It's official: index fund giant Vanguard Group voted against Exxon Mobil management for the first time to require the oil and gas giant to report on climate change, according to proxy voting records published by Vanguard on Thursday.
The Exxon Mobil shareholder measure passed at the company's annual meeting earlier this year, a victory shareholder advocates said could not have happened without the vote of Vanguard, though the fund company had refused to reveal its specific company votes before Thursday's official disclosure.
Vanguard also voted against management at Occidental Petroleum over a similar climate measure — also expected based on the results from the Occidental Petroleum shareholder meeting earlier this year. But Vanguard did vote with oil and gas management and against shareholder climate proposals in a majority of 2017 proxy measures.
The two votes against Exxon and Occidental management contrast with Vanguard's votes against shareholders putting forward climate proposals at Noble Energy, Marathon Petroleum, Devon Energy, Chevon and Kinder Morgan.
Vanguard also voted against requiring Warren Buffett's Berkshire Hathaway to report on climate and divest from fossil fuel holdings.
A Vanguard spokeswoman said its decisions have more to do with how the shareholder proposals are worded and not the fund company's commitment to climate policy among its holdings. "While we believe the issue is real, we may not believe the proposal meets our threshold for support."
Vanguard, the world's largest index mutual fund manager with $4 trillion under management, has not been known for its shareholder activism, but its influence as an investor is large and growing. The fund giant took in more than $300 billion in 2016, while the rest of the mutual fund industry combined had investor redemptions. "With Exxon and to a lesser extent Occidental, these votes can also be seen as bellwethers for the entire industry that major investors are expecting action on climate risk disclosure," said Jon Hale, the director of sustainability research at Morningstar.
BlackRock and State Street Global Advisors, two other investing giants with large exchange-traded fund businesses, have received higher marks in past years from shareholder advocates for commitment to social and environmental issues. Both voted the same way as Vanguard on Exxon and Occidental.
Hale noted that State Street was the strongest voice among the investing giants, voting in favor of six of the seven shareholder climate change measures among S&P 500 energy companies, with the exception of Noble Energy. He said most seemed to be similar in scope.
"What seems to be going on with Vanguard is that they are giving companies time to make progress towards improving their climate disclosures, but in the cases of Exxon and Occidental, they felt they had already done so and not seen the progress they were expecting. That leads me to believe that these other companies will either have to show improvement this year or we should expect Vanguard to vote for the resolution next year."
He also noted that State Street has been active on this issue for a lot longer than Vanguard.
"Funds are not immune from the attraction of taking action at a few high-profile companies to put down a marker that companies need to be more transparent about climate risks, in general," said Heidi Welsh, founding executive director of the Sustainable Investments Institute.
This year, Vanguard began to show a little more of an activist streak in its proxy votes, beyond just climate change. Vanguard voted against three Wells Fargo directors, notable given the crisis the bank still finds itself in, with the latest development on Thursday an acknowledgement from the bank that its fake accounts scandal is much larger than previously disclosed.
Vanguard voted in favor of 47 percent of shareholder measures related to boards of directors, versus supporting only 17 percent of those measures last year.
"We voted on the dissident card more frequently," the Vanguard spokeswoman said. She provided several reasons for that shift in favor of shareholders and against management: Vanguard voted for many gender and diversity measures to be in sync with a new shareholder policy it implemented in April; there were also fewer measures put forward this year from shareholders asking for independent chairman positions at companies, which helped to raise the percentage of shareholder measures the fund company supported.
It cast votes for activist investors to join the board at Buffalo Wild Wings. While long-term mutual fund investors like Vanguard have not been known for shareholder activism, there have been some recent examples of long-only managers banding with activist hedge funds to seek change at portfolio holdings.
Along with the release of its proxy votes, Vanguard issued a letter from its chairman to companies and a report from its Investment Stewardship group detailing its approach to engaging companies, and at times, voting against management.
One point that Vanguard stressed in its climate position that policy is dictated by the investment risk, not politics, of the issue. That has been cited as a reason Vanguard was slow to adopt a stronger policy.
Earlier this year, Vanguard founder Jack Bogle told an audience at the Morningstar conference that when it came to environmental, social and governance issues, "I have felt for long time people laughed at first and they are not laughing anymore. Index funds and managers are the key to strong corporate governance."
Bogle went on: "The index manager can't sell the stock, what can he do? Improve the management. Index funds, including Vanguard, right now are asking for a lot more information."
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The head of Vanguard's Investment Stewardship office, Glenn Booraem, tried to thread the needle in the report released Thursday: "We acknowledge that our clients' views on climate risk span the ideological spectrum. But our position on climate risk is anchored in long-term economic value—not ideology. 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."
Welsh noted that in addition to the Exxon and Occidental votes, 14 additional climate change resolutions at other corporations received at least 40 percent of shareholders' approval. "It's hard for companies to sustain the argument that blowing off the concerns of 40 percent -plus of their investors can be sustainable and not have an impact on market confidence in their long-term strategy."
Booraem had previewed the policy shift in interviews with the press in mid-August, when Vanguard announced it had resolved its own shareholder battle — Walden Asset Management decided to not proceed with shareholder resolutions against Vanguard over issues including climate and diversity, after the fund giant detailed its plans to announce several proactive governance measures.