The emphasis on shaping the conversation around long-term value creation drove Vanguard’s primary interest in joining the Embankment Project. Vanguard's index funds are practically permanent owners of portfolio companies, and its actively managed funds are behaviorally long-term. Vanguard wants portfolio companies to focus on policies that will support sustainable, long-term results. That viewpoint is unwavering, even in a market environment that emphasizes quarterly earnings forecasts and daily news cycles. Vanguard believes that when firms focus on long-term value creation, their funds’ shareholders benefit.
Like the other participants in this project, Vanguard believes that companies can vastly improve disclosure and reporting around the sustainability of their strategy and operations, and the risks most material to their long-term success. Vanguard joined the Embankment Project with the belief that the project could be a catalyst for change that would produce a useful reporting framework for both companies and investors.
Vanguard strongly believes that companies should disclose material information on sustainability matters. But after participating in this project, and from Vanguard professionals’ personal experiences, it is clear that a lack of consistent reporting standards has made it difficult for companies to know which information to report and how to relay it to investors in a comparable manner. Companies need guidance on which initiatives are material to their industry and which metrics should be used to disclose performance.
Investors’ perception of value is evolving, and for many investors, what constitutes a good investment doesn’t solely rest on performance metrics. In fact, some place a premium on other types of value, such as fostering community development or funding affordable housing. That doesn’t necessarily mean those investors are sacrificing financial returns. The notion that companies with best-in-class sustainability initiatives will outperform competitors over the long term is more widely accepted than ever before.
Vanguard’s products are consistent with the company’s investment philosophy and seek to meet enduring investor needs. The company’s Portfolio Review Department performs long-term product planning and monitors changes in the marketplace and in the expectations of investors. Vanguard offers socially responsible investment funds to clients in many regions. These product offerings should evolve as investor preference continues to change.
It is difficult to advocate for long-term value creation in a market environment that is primarily focused on the short term. It is much easier for a company to project cash flows over the next several years than it is to make that same assessment for a 5-, 7- or 10-year period. By focusing on the short term, companies and investors can appear to be “directionally right” more often than they would be focusing on longer investment horizons. Additionally, the number of unforeseen variables impacting an investment, such as technological innovations or new market entrants, is likely to be greater over longer time periods, increasing investment uncertainty.
But those challenges aren’t insurmountable. In fact, many individual investors are already investing for the long term. One of the ways Vanguard embodies its mission "to take a stand for all investors" is by working with the companies held in Vanguard funds to make sure that investors’ interests are always the top priority. Every day, Vanguard honors its commitment to steward shareholder assets by helping shift investors’ and companies’ focus toward the long term. Ultimately, Vanguard believes that all investors have an important role to play in driving this change.
Vanguard believes that the following are best practices for companies focusing on creating long-term value:
- Forgo quarterly guidance
- Prioritize relationships with long-term shareholders and resist distractions from short-term investors
- Articulate a long-term, strategic focus across all reporting and provide supporting metrics that reinforce this orientation
- Make public that a key objective is ensuring long-term success for all shareholders
The company believes that the following are best practices for asset managers focusing on long-term investing:
- Hold investments for the long term, even in actively managed funds; long-term ownership encourages long-term focused company behavior
- Engage with directors and senior managers, and communicate long-term expectations
- Encourage the adoption of compensation plans that appropriately align the interests of management and shareholders over the long term
- Measure company performance over longer time periods