Vanguard Group's move to allow some retail investors a say in how the fund giant votes on corporate hot-button issues is the latest step by a giant asset manager toward shareholder democracy. How will it impact financial advisors and their clients?
The pilot program for ordinary investors in three retail funds, opened on Feb.1, comes as asset managers face a growing backlash to their activism on environmental, social and governance issues at companies whose shares are in their funds. On Feb. 13, Florida Gov. Ron DeSantis
As of now, the emerging conflict isn't causing concern among clients interested in sustainable investing, said David McPherson, the founder of Four Ponds Financial Planning in Mashpee, Massachusetts. He said that a growing interest in ESG investments amid the anti-ESG movement doesn't change how his clients "choose to invest their own money."
Trillion-dollar companies that run giant mutual funds and exchange-traded funds held by millions of ordinary Americans are increasingly noisy about climate and equity topics. They're also choosier about what they opt to back: BlackRock, Vanguard, Fidelity Investments and State Street Global Advisors voted for fewer ESG resolutions in 2022 compared to the previous year, according to
Its research pointed to an increased number and lower quality of resolutions last year and the high-profile ESG backlash unfolding in the U.S. as behind the decline. BlackRock, for example, lost more than $1 billion from resource-rich Republican states that see the group as being against fossil fuels. Democrats think that asset managers are not doing enough to push ESG practices on companies.
Make some noise
Andrew Behar, the CEO of the shareholder advocacy group As You Sow, said Vanguard's move shows that "their clients would like to see the companies in their portfolios actually reduce their systemic risk and vote on issues like climate change. "It's really just pressure from the underlying shareowners." Recent
Vanguard hasn't disclosed who will be eligible for the program, but some investors in the Vanguard S&P 500 Growth Index Fund, the Vanguard Russell 1000 Index Fund and the Vanguard ESG U.S. Stock ETF will be able to select options on how the funds should vote on matters including the election of directors to a corporate board and proposals from management or shareholders. While Vanguard hasn't specified the companies that investors will be allowed to vote on, it said customers can direct their votes proportionate to their ownership in that fund.
"Piloting proxy voting choices is yet another way Vanguard is working to provide our investors with a wide range of options to meet their individual goals and personal preferences," Anne Robinson, Vanguard's general counsel and corporate secretary, said in a statement.
BlackRock, Vanguard and State Street funds own as much as 20% of the largest U.S. public companies but have significant differences in their ESG voting patterns, according to a Morningstar
For Baher, capital markets have already shifted to a more sustainable economy, and more accessible proxy voting can push companies to adopt more ESG resolutions.
"These (conservative) groups are filing a lot of anti-ESG shareholder resolutions, but no one voted for them last year," Baher said. "People don't want to be investing in an extractive risky economy, they want a resilient regenerative economy."
Claudia Gray, the head of financial sector research at the nonprofit ShareAction, said that asset managers "are not consistently using their voting rights to address the multiple environmental and social crises the world is facing." Managers should "strengthen their voting policies, ideally through a commitment to 'comply or explain,' meaning default support for resolutions with positive environmental and social impacts, and issuing a public explanation when votes are not cast in favor," Gray said in a statement.
Legal hurdles
In 2019, the Securities and Exchange Commission issued
Last year, BlackRock started a pilot in the U.K. to include retail investors in the proxy voting process. The asset manager already runs a 1-year-old program in the U.S. in which 25% of institutional investors with $1.8 trillion in eligible assets participate in the voting process. The asset manager said the number of clients interested in enrolling has doubled since last May.
The fund giant, which manages roughly $10 trillion in assets, aims to democratize the process further.
"My hope is that in the future, every investor — ultimately including individual investors — has access to voting choice, if they want it," BlackRock CEO Larry Fink
Fink said in his letter that "We urge others to look for ways to help investors of all types – institutional and retail – have more of a voice in our shareholder democracy."
