John Galloway, the global head of investment stewardship at Vanguard, Inc.--one of the preeminent index fund managers in the United States--recently announced a set of expected climate-focused disclosures that Vanguard expects any company with "significant coal exposure" to adhere to.

Specifically, among other things, Vanguard expects these companies to:

  • "Articulat[e] [] a deep understanding of the current and emerging policy and regulatory environment/framework for these companies in their key reference markets."
  • "Expla[in] [] how thermal coal remains relevant for a company's customer base and the market it serves over 10, 20, and 30 years."
  • "Articulat[e] [] how the business is resilient within a 1.5°C limit of global warming as the world progressively moves to net zero emissions, such as by serving a specific market niche or through carbon capture and storage."
  • "Consider[] [] responsible transition plans for coal mines and power stations, including site rehabilitation and workers' retraining, to minimize risks of liabilities and litigation and preserve social license to operate with communities, governments, and other stakeholders."

Notably, Vanguard has framed this program of disclosures as the "[r]egular reporting of climate-related information in line with the Task Force on Climate-related Financial Disclosure (TCFD) framework."

The rationale for this decision is that, according to Vanguard, "as part of [their] 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" of "stranded assets . . . which significantly weigh on financial performance and returns." In particular, Vanguard seeks "to understand a company's transition plan and ensure value creation through business-model resilience."

This decision and statement of principles by Vanguard is highly significant. In effect, Vanguard--one of the most prominent institutional investors in the world--has announced that it considers companies focused on or dependent upon coal as constituting risky investments in the context of the global focus on climate change. And such companies, in order to still be considered worthwhile investments, must precisely detail how they will adapt in the context of this changing business climate. Moreover, it is noteworthy that one means that Vanguard has identified for such companies to demonstrate their ability to adapt is to embrace certain climate-focused disclosures.

As can be seen by this development, among others, the impetus for climate-focused disclosures extends beyond government regulators to the private sector, indicating the broad societal desire for this information, and for the climate-focused policy concerns that animate it.

There is compelling scientific consensus, expert perspective, and global recognition that achieving the Paris Agreement targets will require that companies reduce thermal coal production and/or unabated coal power generation over the coming years and decades. This perspective was acknowledged and reaffirmed by the Glasgow Climate Pact at COP26. We believe that companies should disclose their plans and the rationale for their approach. That includes disclosing timelines and related plans for asset closures and/or diversifying their asset portfolio in line with applicable legal and regulatory requirements to achieve policymakers’ stated objectives of a net zero carbon economy. Elements of disclosures: 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...

https://corpgov.law.harvard.edu/2022/01/07/vanguards-expectations-for-companies-with-significant-coal-exposure/#1