The Vanguard Group is expanding a pilot program that gives investors in index funds the power to choose a proxy-voting philosophy when the money manager votes on their behalf. It's the latest move in trend among the world's "Big Three" index fund managers -- BlackRock, Vanguard and State Street -- to defuse controversy surrounding voting on shareholder proposals that push the woke environmental, social and governance (ESG) agenda.
Vanguard took its first steps in this direction last spring, letting investors choose from four proxy voting options:
Vanguard-Advised Funds Policy: Shares are voted "in a manner that seeks to maximize long-term shareholder returns."
Company Board-Aligned: The fund investor's proportionate share of votes on each measure is cast in alignment with the recommendations of the company's board of directors
Glass Lewis ESG: Glass Lewis is a proxy advisor; in this option, the investor's shares go all-in on the woke agenda that emphasizes "climate action," diversity, "equity" and social issues
"Not Voting": The investor's proportionate shares are left un-voted on all proposals
Far too much power is concentrated in the hands of “shareholder services” companies like ISS and Glass Lewis, because so much of the market is passive/index funds, which outsource shareholder voting decisions to them.
— Elon Musk (@elonmusk) January 24, 2023
ISS and Glass Lewis effectively control the stock market.
"We recognize that our investors have diverse perspectives, and we are committed to further engagement and exploration in this area to ensure our clients’ needs are met," said Vanguard at the time.
Last year's initial foray spanned three Vanguard equity-index funds. In early February of this year, Vanguard added two more. Here's the updated roster of funds covered by the voluntary, opt-in program (the two new funds are listed last):
Vanguard S&P 500 Growth Index Fund
Vanguard Russell 1000 Index Fund
Vanguard ESG U.S. Stock ETF
Vanguard Mega Cap Index Fund
Vanguard Dividend Appreciation Index Fund
Like you, we're scratching our heads about why an ESG ETF would be among the first in the pilot, given investors in that fund have already made their proxy-voting philosophy clear by simply choosing the fund.
The end of 2023 brought a major milestone, as total index-fund assets under management surpassed actively managed funds for the first time. The decades-long rise of passive investing has put the Big Three indexers in a position of major power to steer corporate agendas -- and has put them in the crosshairs of angry investors and Republican officials who think shareholder returns should be the only consideration when voting proxies.
Overlaying a woke agenda on a passive investment strategy makes for bizarre situations. For example, an explicitly-ESG mutual fund would likely steer clear of fossil fuel companies altogether. However a regular index fund is compelled to invest in them. If that same fund embraces an ESG proxy-voting strategy, that means it buys a fossil fuel company's shares because it has to, only to turn around and start pressuring the company to get out of the fossil fuel business.
That's what happened on a particularly dark day for rational investment markets: In 2021, BlackRock, Vanguard and State Street all voted to install three dissident directors on Exxon's board who were pursuing seats with the explicit aim of forcing Exxon to reduce its carbon footprint. Their votes put them over the top.
As the madness of the ESG agenda was increasingly drawn to public attention, fund managers have been buffeted by divestments, lawsuits, anti-ESG legislation and retail investor complaints and redemptions.
Vanguard has been leading the Big Three away from the ESG precipice. In December 2022, the company withdrew from the Net Zero Asset Managers Initiative, a coalition that once had 300 asset managers signed on to reduce greenhouse gases and lower the earth's temperature by 1.5 degrees Celsius by 2050. "[Vanguard is] not in the game of politics," CEO Tim Buckley told the Financial Times at the time. In mid-February of this year, JPMorgan and State Street quit the Climate Action 100+ pact, while BlackRock reduced its involvement in the initiative.
State Street and BlackRock have also rolled out "pass-through voting" initiatives similar to Vanguard's, but with eligible funds that account for larger swaths of their assets. BlackRock offers six proxy-vote policies to choose from.
These are promising developments, but with index funds counting large corporate and pension funds among their investors, it remains to be seen who will prevail in the proxy-policy tug-of-war.
