Vanguard executive sees investment value, ESG issues converging in strategy

? Vanguard Group Inc., one of the world's largest investment managers, has doubled the size of its investment stewardship team since 2015.

? In 2017, the team engaged 954 times on governance issues with companies representing $1.1 trillion in assets.

? Looking ahead, gender diversity on boards is a top, evidence-driven priority, Vanguard's investment stewardship officer says.

Glenn Booraem has helmed Vanguard's corporate governance-focused investment stewardship team as it has grown and cast its first two votes related to climate risk, on shareholder proposals that led Exxon Mobil Corp. and Occidental Petroleum Corp. to disclose more climate risk information.

The team is focusing on four pillars of investment priorities: board composition, governance structure, executive compensation and risk oversight. Those goals have increasingly shaped Vanguard's engagement with the thousands of global companies in which it invests. Booraem spoke with S&P Global Market Intelligence on how the priorities are playing out and where Vanguard is focusing its energy in the environmental, social and governance, or ESG, space. The following is an edited transcript of that conversation.

S&P Global Market Intelligence: In your recent annual report on investment stewardship, you said gender diversity on company boards is a priority. How are you bringing that topic to companies and what would success on that front look like to you?

Glenn Booraem: There have been a number of studies recently published around the value of gender diversity to boards in terms of decision-making and long-term returns. That's the hook for us and what gets us interested in this from an engagement standpoint. At the end of the day, regardless of the issue, we're focusing on those things that we believe will drive longer-term value for the 20 million investors who have entrusted their assets to Vanguard.

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Glenn Booraem, Investment Stewardship Officer

Source: Vanguard Group, Inc.

What success looks like over time for us, in any one of these dimensions, will be progress towards what we see as beneficial for long-term shareholder return. We don't have specific targets on a year-over-year basis because in many instances the changes for which we're advocating take time.

What we're more interested in is understanding the boards' process to drive progress over time. We don't simply want boards to go out and randomly select directors that will add diversity to the board simply for diversity's sake. We want boards to have an active process to evaluate their composition over time that takes diversity on many different dimensions into account.

It's as much about process as it is about specific outcomes on any given measure.

You've stressed that the investment stewardship group is more about long-term economic value than, say, social good. Why is it important to Vanguard to emphasize that, and could you see social topics become a priority at some point?

Our perspective is informed by the fact that we've got, as I've mentioned, 20-plus million investors who have entrusted their assets to Vanguard.

We know from our communication with clients over time that they have points of view at every point on the spectrum for many social issues. The thing we're trying to do is identify the pieces of those, and what we believe the risks from those issues are, that will affect long-term value and then drive disclosure of those risks.

Now that doesn't mean that stakeholder perspectives on these issues are irrelevant. Our view is that over time, the interests of shareholders and other stakeholders will converge to drive long-term performance.

Do you feel that there has been more emphasis on these objectives and risks, and ESG investing as a whole, over the last few years?

I think there has certainly been growing dialogue around this broad range of issues over the past several years. You've seen the evolution of organizations like SASB [the Sustainability Accounting Standards Board] that are trying to identify the set of risks that are likely to have long-term material impact on an industry level, as opposed to a broad brush approach to imposing disclosure on every single company. We're seeing more and more companies, still relatively small numbers, but a number that have actively adopted the SASB standard.

You've seen increasing support for shareholder proposals on many of these topics, and I think that, over time, will drive adoption by more and more companies of the types of reporting, disclosure and dialogue that are responsive to some of these issues.

Vanguard participated in two votes last year on climate risk, which was a first for the group. So how has your role, or your way of interacting with companies on these issues, changed?

There's a number of things that converge over time to drive support for a particular proposal at a particular company, from the substance of the proposal to the potential impact of the disclosure, and in this case, on the markets' assessment of value, and importantly, on management and the boards' responsiveness to shareholder and other market interests.

I think the interesting thing to see over time will be how companies across various industries will respond to growing investor support for these types of proposals. The fact that a number of these climate risk proposals got support at a couple of large companies sends a message more broadly to other members of those industries that these are clearly issues many of us believe have a linkage to long-term value. We expect additional momentum in advancing the dialogue year over year, based on the growing support not just from us but from other institutional investors.

What are some of the biggest risks that you see right now, at industry levels?

That's one of those things that's really hard, at the individual company level or even at the industry level. It's one of the reasons why we think standards like SASB or others in the same vein are most important. Our focus first and foremost is going to be on the board and understanding their process for overseeing those risks more locally, and incorporating them into strategy and their communications with us.

We're focusing on those types of risks that we see as consistent across the board, like compensation, and supplementing that with those risks that may be more material on an industry basis.

That's one of the reasons why climate risk in energy and utilities companies was one of our big focuses. There's an entirely different range of risks in sectors like consumer and retail that is driving risk there. It's really going to be case by case.