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Executive Summary

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• With stakes in more than 10,500 companies, Vanguard is what is known as a 'universal owner'. Exposed to a representative slice of the market, universal owners have an interest not in the returns of this or that individual company, but in the net growth of the market. In turn, this means that it is in their interest to tackle systemic risks to the market, easily the most potent of which is climate change. If the benefit that a company derives from a carbon-intensive activity is less than the costs that this activity imposes on the rest of the market, then a universal owner will benefit from bringing it to a halt.
   

• This report assesses whether Vanguard acts as a universal owner on climate change in three steps. First, we articulate the interests of a universal owner and how they should act to realize those interests. Second, we break down Vanguard's equity and bond holdings in fossil fuel production, showing the depth of its investment in activities that are – in a great many cases – a net harm to its portfolio. Third, we assess Vanguard's stewardship of its portfolio against two standards, the U.K. Stewardship Code and UNPRI's Active Ownership 2.0.
   

• We find that Vanguard is not acting as a universal owner. Instead, it models itself as a 'permanent owner' whose passive holdings give it an interest in the long-term value of its portfolio companies. The stated aim of its stewardship is to safeguard that value by encouraging companies to disclose their climate risks to the market so that the risk is priced into their valuation. But minimizing the risk that climate change poses to individual firms is not the same as minimizing the risk which individual firms pose to the climate. While they sometimes converge, often they do not. As UNPRI suggests, institutional investors should stop using disclosure as a proxy for decarbonization and instead demand real-world decarbonization itself. In this respect, Vanguard is an instructive case study of the 'engagement gap', the distance between best practice for engagement, and where the market currently is.
   

• We assess Vanguard's equity and bond holdings in thermal coal and the Alberta tar sands. Vanguard's equity gives it effective ownership over assets responsible for the production of 40m tons of coal a year, and 1.4bn barrels of oil from the Alberta tar sands. Through the bond markets, it has lent at least $7.6bn to coal companies. Crucially, $3.6bn of these bonds are due to mature over the next ten years. Thus, Vanguard faces a decision: it will either cease to finance these companies or recapitalize them and inject billions of dollars of new capital into the heart of the fossil fuel economy.
   

• Vanguard's fossil fuel holdings are out of step with many asset owners who entrust their funds to the asset manager. A prime example is the tech sector. We investigate ten leading tech companies that hold employee pension plans with Vanguard and follow where Vanguard is funneling this money. We discover that the employees of these companies effectively own assets responsible for the production of 10m barrels of tar sand oil a year. Further, they have provided a minimum of $15m through the bond markets to pure-play tar sand companies.
   

• Vanguard's stewardship team is under-resourced. It has only 1 member of staff for every 300 portfolio companies, making it untenable for the asset manager to monitor and engage across its portfolio effectively. We estimate that its total stewardship budget is equivalent to just 0.16% of its gross asset management fees. Its staffing numbers compare unfavorably to competitors like BlackRock, which has 1 stewardship staff member for every 200 companies.
   

• There are, however, possible signs of change. In March of this year, Vanguard joined the nascent 'Net Zero Asset Managers Initiative'. As a member, Vanguard will have to define the proportion of assets intended to reach net-zero emissions by 2050 and set an interim target matching this goal for 2030. Over time, members are supposed to review their targets, 'with a view to ratcheting up the proportion of AUM covered until 100% of assets are included'. If pursued, it would be a major statement of intent. But if Vanguard is serious about transitioning its portfolio towards net-zero, it will have to adopt stewardship and investment policies commensurate with the scale of this task.