Last month, the Vanguard Investment Stewardship team published “Expectations for Companies With Significant Coal Exposure,” which explains the firm’s position on coal. Although it won’t please everyone, my opinion is that it is well thought out, acknowledging realities of the energy situation and practicality of action for companies and their long-term investors. Vanguard acknowledges that “coal burning is the most GHG-intensive way to generate electricity and coal-fired power plants are the single largest contributor of global emissions.” There are “developments [that] represent significant risks to shareholders value in carbon-intensive industries.”
Even so, the firm recognizes the complexity of the issue. Here’s an excerpt:
“Coal has long played a vital role in the global economy and energy mix…In some countries, particularly those in emerging markets, coal represents an important natural resources; for some countries, it is a crucial export and contributor to GDP. This reality cannot be overlooked. If companies in these countries were to curtail their coal use dramatically and suddenly, as some shareholder proposals advocate, it could cause significant social and economic disruption and adverse impacts.”
Vanguard then explains its engagement strategy with coal companies, also pointing out that:
“[S]ome financial services companies are phasing out financing of and insurance services to companies with exposure to coal, which can inhibit them from funding continuing operations and future growth opportunities… These risks can translate into stranded assets (assets that have lost their value because of the energy transition), which significantly weigh on financial performance and returns. Therefore, as part of our fiduciary duty to shareholders in the Vanguard funds to support the long-term value of their investments, we seek to understand the actions coal-exposed companies are taking to mitigate this risk.”
To this end, Vanguard says that it expects companies to provide clear disclosures on Board-level climate competence and governance – including disclosure about board skills, policy & regulatory frameworks in applicable markets, how thermal coal remains relevant in applicable markets for the next 10, 20 and 30 years, and how the company will deliver shareholder value through a transition to implementation of the Paris Agreement. Vanguard also says that it wants disclosure about companies’ risk mitigation efforts – including capital allocation decisions, energy mix and plans for transitioning coal mine and power station properties.
In its summation, they make this statement about the “divest versus engage” argument:
“[I]n the case of climate risk, we believe it is better to own, engage and encourage boards to manage climate risks through the transition to a low-carbon economy than it is to exclude and divest. Investors who rid themselves of carbon-producing assets risk selling them to those who might not want to engage and encourage change. This may not help – and may frustrate – the just and orderly transition to a decarbonized economy that the investor hopes to achieve.”
What This Means to You
For operating companies, this is a notable acknowledgement from one of the “Big 3” asset managers that transitioning to a low carbon economy won’t happen quickly and there won’t be a silver bullet. The goal will be achieved over decades and as an aggregation of many separate actions, policies and technological developments. Vanguard’s position may not make everyone happy, but it does reflect certain realities and limitations of the global energy situation.
However, companies that have significant coal exposure should also pay close attention to Vanguard’s disclosure expectations, which are significant. To underscore the board competence and risk mitigation issues noted above, Vanguard says that it wants:
- Clear, comprehensive, compelling disclosures on the expectations outlined above, to allow the market to accurately price securities.
- Regular reporting of climate-related information in line with the Task Force on Climate-related Financial Disclosure (TCFD) framework and other applicable local standards or codes, on an annual basis or more frequently as needed/appropriate.
- Disclosure on how corporate political involvement and lobbying, directly and through membership in industry associations, adheres to disclosed business strategy in alignment with the Paris Agreement goals.
