31 May 2021

ESG at the Vanguard of proxy voting

GILES RAFFERTY, Corporate Communication and Media Advisor.

The financial markets adage is if Wall Street sneezes other markets catch cold. So it is worth keeping an eye on what’s happening in US financial markets as trends there tend to inform decision making elsewhere. In this context we have been interested to note how Vanguard, one of the Big Three index funds that loom large on the registers of companies globally, has updated their proxy voting guidelines.

The changes focus on a range of policies concerning ESG disclosures; Board diversity and Board oversight. The new guidelines came into force on 1 April 2021 and we highlight some of the key updates below.

Environmental/social disclosure

When it comes to shareholder proposals addressing environmental and social matters Vanguard has revised its guidelines to include an assessment if an issue has material risk to the sector or company and has the potential to affect long-term shareholder value. The previous guidelines required ESG proposals to have a “demonstrable link” to long-term shareholder value in order for Vanguard to support them. Vanguard is also now likely to support proposals addressing shortcomings in a company’s ESG disclosure relative to established frameworks such as the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD). In addition, it will be more likely to consider ESG proposals that remain within a “governance scope,” such as those that request goal-setting against a company priority rather than how management have executed ESG initiatives.

Climate-related disclosure

Vanguard is now likely to support proposals that request disclosure on how climate change risks are incorporated into strategy and capital allocation decisions, or ask for an assessment of climate risk.

Board diversity

Vanguard is likely to vote against a company if the Board has made insufficient progress on Board diversity. It will consider its voting decisions on a case-by-case basis and will look at issues around market regulations and expectations along with company-specific issues. The fund management giant does not make specific recommendations around diversity requirements but has indicated that companies with no disclosed board gender diversity, no disclosed board racial or ethnic diversity, or a lack of a disclosed board diversity policy will be viewed as being higher risk of having a vote against them.

‘Overboarded’ directors

Vanguard does not discount supporting an ‘overboarded’ director when there are compelling company-specific facts and circumstances underpinning their appointment. It has now added a new provision linked to director diversity, under which it will consider how an ‘overboarded’ director contributes to a Board’s skills and diversity composition when deciding how to vote on the election or re-election of such a board member.

Independent chair

Vanguard takes the view the leadership of the Board is a matter for the Board so is not inclined to support separation of the roles of Chair and CEO, unless there are, what it describes as, significant independence or board effectiveness concerns. The fund manager has identified failing to manage environmental or social risks, especially where they could negatively impact shareholder value, amongst factors that may raise such independence or effectiveness concerns. Such oversight failings may prompt Vanguard to vote against responsible directors and in some cases call out the environmental and social risks as factors it considered in assessing such failures.


Vanguard’s policy updates suggest there will be a shift in the Fund Manager’s voting behaviour to include a greater focus on ESG and climate change-related proposals. For companies, the updated Vanguard voting guidelines are a timely reminder to take stock of how their ESG disclosures and practices compare to peer practices and market norms. The ever increasing importance of ESG reporting is exactly why FIRST Advisers has been advocating for some time that companies which have yet to include this as part of their engagement with the market, begin the journey now.

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