Governance Archives - Carbon Zero 2040

Vanguard’s 2025 Proxy Guidelines came out last week, prompting coverage of their softening of ESG and DEI language from both Reuters and ESG Dive. Reuters described it as “dialing back diversity language”, and ESG Dive as “diluting board composition recommendations on diversity”. Vanguard’s response was to state that the changes weren’t significant, and that they were simply part of their annual review process.

These changes are a shift toward a more neutral, case-by-case approach that prioritizes “market norms” over global governance frameworks. It’s hard not to conclude that “market norms” is simply code for shifting in the face of pressure from government, whether at the State or Federal level.

Here are the key changes that Vanguard made.

1. Board Composition and Diversity

2024 Policy

Emphasized board diversity, stating that boards should reflect “diversity of attributes including tenure, skills, and experience” and represent “diversity of personal characteristics, inclusive of at least diversity in gender, race, and ethnicity.”
Expected companies to disclose their approach to board composition, including the process for evaluating effectiveness, addressing gaps, and evolving board membership.
Vanguard’s funds would vote against nominating/governance committee chairs or other board members if a company failed to take action on board diversity.

2025 Policy

Softened the language on diversity, now emphasizing “diversity of thought, background, and experience, as well as personal characteristics (such as age, gender, and/or race/ethnicity),” but without setting explicit expectations for representation.
Board diversity expectations are now more market-specific, meaning Vanguard will assess board diversity based on local listing standards and governance frameworks rather than a global standard.
Instead of outright voting against nominating/governance chairs for failing to address diversity, Vanguard now considers market norms and corporate explanations before taking action.

Key Change:

Vanguard is stepping back from an explicit commitment to gender and racial diversity as a key voting criterion and shifting towards a broader, more flexible approach focused on market norms.

2. Environmental & Social Shareholder Proposals

2024 Policy

Vanguard was willing to support shareholder proposals if:
1. They addressed a shortcoming in a company’s disclosure relative to market norms.
2. They reflected an industry-specific, materiality-driven approach.
3. They were not overly prescriptive about how a company should act.
Climate risk disclosure expectations: Vanguard could vote against boards that failed to disclose material climate risks, particularly if they were misaligned with frameworks such as the Paris Agreement.
Supported workforce demographic disclosures, including publishing EEO-1 reports, where relevant.

2025 Policy

Less emphasis on ESG-related disclosures: The 2025 policy still evaluates environmental and social shareholder proposals but weakened its criteria for supporting them.
Climate risk oversight changes:
- Removed reference to alignment with the Paris Agreement as a factor in assessing risk management failures.
- The language around voting against directors for failing to oversee climate risks has been diluted to focus more on “company-specific context” rather than alignment with global standards.
Social Risk & DEI Reporting:
- Explicit support for workforce demographic disclosures (e.g., EEO-1 reports) has been softened.
- The policy does not explicitly mention diversity, equity, and inclusion (DEI) oversight as a voting criterion, whereas it did in 2024.

Key Change:

Vanguard has scaled back its willingness to support ESG and DEI-related shareholder proposals, particularly on climate disclosures and workforce diversity reporting. The 2025 policy is more company-specific and market-based, rather than aligned with global frameworks like the Paris Agreement.

3. Executive Compensation (ESG Metrics in Pay)

2024 Policy

Vanguard stated that it did not expect ESG (environmental, social, governance) metrics to be a “standard component” of all executive compensation plans.
However, if a company chose to include ESG metrics, Vanguard would evaluate them based on rigor, disclosure, and alignment with key strategic goals.

2025 Policy

The stance remains similar: Vanguard does not require companies to include ESG metrics in executive pay.
However, the 2025 guidance removes direct references to ESG as a consideration in performance-linked compensation decisions.

Key Change:

While Vanguard already had a neutral stance on ESG-linked compensation, the 2025 policy makes an effort to further de-emphasize the relevance of ESG incentives.

Overall Takeaways:

1. Shift Away from Explicit Diversity Expectations

2024 emphasized gender, racial, and ethnic diversity in board composition.
2025 softens this to a broader “diversity of thought and background” approach.
Voting enforcement for diversity-related shortcomings is now more flexible and market-dependent.

2. Weaker Support for ESG & DEI Shareholder Proposals

2025 moves away from references to the Paris Agreement and broad climate risk disclosure requirements.
Vanguard is less likely to support shareholder resolutions demanding climate action or DEI-related reporting.

3. Decreased Focus on ESG Metrics in Executive Pay

2024 allowed for the evaluation of ESG-linked compensation where relevant.
2025 removes direct mention of ESG factors in pay evaluation.

In early October, while the United States was still reeling from the impact of Hurricane Helene, Abrahm Lustgarten wrote that people fleeing climate disasters will change the American south (Propublica and NYTimes). This isn’t new news. NGOs have been forecasting massive population displacement due to climate change for some time now. For example, in 2021 the World Bank forecast over 200M persons could be displaced, most within their own countries, by 2050. In the United States, estimates are that as many as 13M people will be displaced by the end of the century, primarily from the south.

Lustgarten’s article focused on the social costs of this migration. He made it personal by talking about the follow-on impacts that the hollowing out of the south would set in motion. But what about the risks to business? After all, the southern United States is home to key players in Energy and Oil (45% of US refining capacity is on the Gulf Coast), Retail and Consumer Goods (Walmart, Home Depot, Lowes), Technology and Communications (AT&T, Dell), and Logistics and Transportation (UPS and Fedex). Some estimates are that 30 to 40% of the Fortune 100 will be impacted by changing weather patterns in the South.

Many boards and management teams are already considering the physical risks extreme climate brings. Depending on the business, any or all of these risks must also be considered:

1. Labor Market Disruption: Businesses in coastal areas like Florida and Texas will face labor shortages as younger, skilled workers relocate inland. The remaining population will primarily consist of older individuals with limited capacity for employment, exacerbating productivity issues.

2. Supply Chain Disruptions: Frequent extreme weather events, such as hurricanes, may disrupt supply chains by damaging infrastructure, reducing access to essential goods and inputs. This will increase operational complexity and costs, especially in regions prone to storms and flooding.

3. Market Demand Shifts: As populations move inland, consumer demand will decline in vulnerable coastal areas. Businesses dependent on local markets will experience a reduction in revenue, necessitating adaptation to shifting demographic patterns and potentially moving operations to inland, safer regions.

4. Regulatory and Legal Risks: Businesses in affected regions may face new government regulations regarding disaster preparedness, land use, and environmental protection. The financial burden of complying with these regulations could increase as local governments seek to address the effects of climate migration.

5. Property and Asset Risks: Coastal properties and physical assets in regions identified as “abandonment zones” will likely decrease in value as residents leave. Businesses may find it increasingly difficult to sell or maintain properties in high-risk areas, leading to potential losses and higher insurance costs.

6. Social and Political Instability: As communities age and face greater economic decline, social services will become strained, and political instability may arise. Businesses may encounter a more challenging operational environment with reduced government support and rising tensions in affected communities.

7. Brand and Reputation Risks: Businesses that fail to act on climate risks or support local adaptation efforts may face reputational damage, especially in regions where migration pressures are mounting. Proactive strategies to assist displaced populations or support sustainability could enhance brand image.

8. Financial Risks: Investors may reassess the viability of businesses operating in vulnerable coastal areas. Access to credit may tighten for firms seen as overexposed to climate-related risks, particularly if asset values decline and revenue forecasts are uncertain.

9. Operational Adaptation: Businesses will need to adapt operational models to serve a changing demographic, including older, less mobile populations. This may involve investing in new products, services, or technologies that cater to an aging customer base or relocating operations to safer areas.

Which of these enterprise risks are material to your business? How does your company assess these risks? How frequently? What is your near-term extreme weather mitigation strategy, and your long-term sustainable business strategy?