Salisbury University
PA-10: Sustainable Investment

VIAS unfortunately cannot break down by dollar amount for the categories listed above.

Vanguard’s mission is to give investors the best chance for investment success. We believe responsible investment is consistent with our fiduciary duty to manage investments in the best interest of clients. Our policy and approach to responsible investment is outlined below.

Passive equity

Index funds have revolutionized investing by providing millions of investors with broad market exposure at a very low cost. They predominantly track benchmarks constructed without consideration of ESG criteria. Because ESG risks can undermine returns over the long run and our index funds are essentially permanent owners of the companies in which they invest, Vanguard’s Investment Stewardship team votes proxies, engages with company directors and executives, and advocates for market-wide adoption of governance best practices to address these material risks. Although we want companies to mitigate material risks, we do not dictate strategy.

Active fixed income

ESG risk is one element of Vanguard Fixed Income Group’s bottom-up financial analysis for potential investments. The team quantifies the financial materiality of ESG risk and assesses whether a security’s current valuation properly reflects that risk.

Active equity

The majority of Vanguard’s active equity funds are managed by external firms. This approach provides us with diversity of thought and broader access to top talent. Each firm has its own philosophy and process, and many consider ESG factors when selecting securities.

Vanguard’s Oversight and Manager Search team is responsible for monitoring the external managers’ performance. As part of that oversight, the team reviews the external managers’ sustainability and ESG risk practices. By allowing the managers to vote their own proxies, Vanguard enables our managers to integrate their own analysis and direct engagement with portfolio companies into their investment strategies.

ESG products

Some investors simply don’t want exposure to ESG risks or want to avoid companies that don’t align with their values. Vanguard currently offers more than a dozen exclusionary (or negatively screened) equity and fixed income ESG products across the globe. These products use transparent exclusion measures to remove certain companies from their investment universe based on predetermined ESG screening criteria.

Please see the following link for more information about sustainability at Vanguard:

https://corporate.vanguard.com/content/corporatesite/us/en/corp/who-we-are/we-care-about/sustainability.html

Please see the previous response on how we guide managers depending on the investment type.

Vanguard’s board of directors and our officers have a fiduciary responsibility to seek to maximize investment returns for fund shareholders, consistent with each fund’s investment objectives and policies. When determining how to vote proxies for the corporations held by the funds, the main consideration is to maximize shareholder value.

For proxy proposals that are likely to have a major effect on shareholder value, such as mergers and acquisitions, we may cast our vote based on a fund advisor’s recommendation.

Proxy proposals fall into four broad categories.

Election of the board of directors and appointment of independent auditors

For auditor appointments, our policy is to support the corporation’s board of directors’ recommendations, unless the auditors have changed frequently or there is a reasonable concern as to the auditors’ independence.

Vanguard generally votes in support of management’s slated board of directors, although when circumstances warrant, we might not support the election of the management’s proposed board. Examples of these instances include when:

- A proxy contest occurs.
- Management compensation seems conspicuously without correlation to stock performance.
- The board fails to take appropriate actions when persistent, subpar corporate performance occurs.

Corporate social and policy issues

Shareholders are most often the ones to initiate corporate social and policy proposals. These proposals typically require that the corporation disclose or amend certain business practices and policies.

Vanguard believes that management is responsible for ordinary business matters that affect corporate profitability, directly or indirectly, and that these issues should be subject only to the corporation’s board of directors’ approval.

We might make exceptions to this position when we have adopted a specific voting policy that conflicts directly with management’s position, or when the issue has economic significance.

Issues of corporate structure and shareholder rights

Either management or shareholders can raise corporate-structure and shareholder-rights issues. Their common goal when raising these issues is to revise the corporate bylaws to affect shareholder-ownership rights.

Vanguard reviews these issues on a case-by-case basis, voting to provide each corporation’s management with the greatest operational latitude without compromising shareholders’ ownership rights. In general, our view is that barriers erected by corporations to thwart mergers or takeovers could depress the corporation’s value in the marketplace.

Executive and director compensation

Management or shareholders can make compensation proposals, although shareholders generally focus on executive, rather than director, compensation.

Management-sponsored proposals for executive compensation typically seek to link pay with specific corporate-performance indicators, such as return on equity. Another common proposal is to amend or augment executive stock-option plans.

Vanguard considers new and amended executive-compensation plans on a case-by-case basis. Our general policy is to vote in a way that provides management with the ability to provide executives fair, competitive compensation packages, without preferential treatment and without excessive dilution of shareholders’ ownership stakes.

When voting on director compensation, we consider the reasonableness of each director’s whole compensation package, including the annual retainer, any meeting fees, stock options or grants, and pension-benefit level.

Shareholder proposals targeting executive compensation typically look to limit it. A common request is to limit compensation to no more than that of the President of the United States.

Our view is that a compensation committee composed predominantly of independent directors should address executive compensation terms. We generally do not support compensation-related shareholder proposals.

For detailed proxy-voting guidelines, please see:

https://corporate.vanguard.com/content/corporatesite/us/en/corp/how-we-advocate/investment-stewardship/reports-and-policies.html

Please see the following links which include our most recent quarterly engage report:

https://corporate.vanguard.com/content/dam/corp/advocate/investment-stewardship/pdf/policies-and-reports/engagement_1q_2023.pdf

And a list of our investment stewardship insights:

https://corporate.vanguard.com/content/corporatesite/us/en/corp/how-we-advocate/investment-stewardship/investment-stewardship-insights.html

By design, our index funds buy and hold companies for as long as they are in the benchmark index. So, divestment is not an option for index funds that lack a mandate to avoid certain sectors or companies. In addition, from a real-economy perspective, there are significant limitations and downsides to divestment as an instrument of change.