SEI-US has placed the retirement assets of its employees with Vanguard, the largest global provider of mutual funds, for over a decade.

Fiddlers Ferry power station, UK
Fiddlers Ferry power station, UK. In 2015, Energy Secretary Amber Rudd announced a plan to phase out coal power in the UK by 2025, an example of the kind of transition risks faced by fossil fuel companies as we move towards a low-carbon economy.  Photo: Phil Gradwell / Flickr.

In late April 2017, SEI-US Climate Program lead Peter Erickson, Centre Director Michael Lazarus, and Financial Director Chris Swartz wrote:

We urge Vanguard and its Investment Stewardship Oversight Committee to adopt a policy that requires the companies in which you invest to annually disclose climate risks, especially transition risks, that help bring to light when a company’s business model is materially put at risk by – and therefore at odds with – a climate-safe world.

The idea of transition risk is gaining increasing attention. The international Financial Stability Board, chaired by the Bank of England’s Mark Carney, has recommended that investors disclose how a transition to a low-carbon economy would affect asset valuations. Such an assessment – sometimes called a “stress test” – may show, for example, that dramatically decreased demand for fossil fuels could challenge the business models of several of Vanguard’s core holdings.

We wrote the letter because we believe that many company business models are not sufficiently consistent with a low-carbon transition. As the International Energy Agency has pointed out, if companies and investors “misread” the scale and pace of policy action towards the needed energy transition, some fossil fuel companies could experience severe losses once it is underway.

Greater transparency about transition risks could help to avoid potential misreads. By contrast, if firms seek to conceal the financial risks of such a transition – as some fossil fuel companies have been accused of doing – this may not only increase the financial risks to investors but may even undermine the low-carbon transition itself, encouraging businesses to continue with high-carbon investments.

Vanguard previously rejected a proposal that would have required ExxonMobil, one of its largest holdings with over USD 5 billion in share value, to disclose these climate transition risks.

We sent this letter in hard copy to the Investment Stewardship Oversight Committee. We also sent it by email to Glenn Booraem, Vanguard Principal and Investment Stewardship Advisor. We will update this story if and when we receive a reply.

Read the full letter (PDF, 135 KB)