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Shenango is polluting my neighborhood, and I wish Vanguard would use its clout to make it stop

Shenango is polluting my neighborhood, and I wish Vanguard would use its clout to make it stop

As a financial journalist, I’ve covered the mutual fund industry for 18 years, the last five of which from my home in Bellevue outside Pittsburgh. I’ve written a largely favorable book about the Vanguard Group and own Vanguard funds personally, but I don’t know if in good conscience I can continue to because of my wife.

Often Tanya struggles up and down the stairs and has to use her asthma inhaler four to five times in a single day. She almost never used it when we lived in New York. She was healthy, ran two marathons. Now I worry that one day I will have to call an ambulance.

Though I knew Pittsburgh’s air quality was poor before I came here, I didn’t know that Bellevue’s incidence of asthma, heart disease and cancer was much worse than the rest of Allegheny County. The reason is we are downwind from the Shenango coke plant on Neville Island. It has been the subject of numerous lawsuits and has even faced 114 air pollution violations in a single year — to little avail.

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DTE Energy, a publicly traded company, owns the Shenango plant. Vanguard is DTE’s largest shareholder. As such, Vanguard can have tremendous influence on DTE’s practices and board of directors. But so far it has refused to exercise that influence.

As a point of fact, Vanguard can’t divest its DTE shares. It runs index funds that must buy and hold every stock in the market forever. Nor would I want it to divest if it could. I prefer shareholder engagement. Shareholders can hire and fire corporate board members who hire and fire CEOs. They vote on executives’ compensation packages. They can also propose and vote on resolutions to change corporate policies.

Vanguard claims an active role in corporate governance. This November, CEO William McNabb boasted to the Philadelphia Inquirer that he sent out 350 messages in 2014 to companies saying “Here’s something we don’t like.” That made me smile because he said almost the same thing to me five years ago when I asked him about governance for my book about Vanguard.

The party line at Vanguard as the world’s largest mutual fund company has always been that it works behind the scenes to influence governance. But the public evidence is contradictory. One 2011 study — the most recent available — by union AFSCME found that Vanguard had the worst record of large fund companies when voting for shareholder proposals to reign in excessive executive compensation.

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There’s little evidence anything’s changed. In the 2014 proxy voting season, the company voted 94 percent of the time to approve executive pay packages and supported 92 percent of board member nominees.

In DTE’s case, Vanguard has consistently supported its board and voted against every shareholder proposal since 2010. A 2012 proposal by the New York State Common Retirement Fund asked that DTE “adopt quantitative goals for the reduction of greenhouse gas and other air emissions in anticipation of emerging EPA regulations; and that the company report to shareholders by Sept. 30, 2012, on its plans to achieve this goal, including plans to retrofit or retire its existing coal plants.” That could’ve made my neighborhood a better place to live.

Institutional investors often scoff at such proposals as irrelevant to shareholders. But there’s ample evidence environmental behavior affects financial prospects. In June 2012, Deutsche Bank published a report analyzing the results of some 100 academic studies and 56 research papers on sustainable investing. In 89 percent of the studies, companies rated highly on environmental, social and governance factors beat the stock market.

Companies with bad environmental records can face regulatory fines, reputation damage and class-action lawsuits. Right now, DTE’s Shenango infractions are a minor cost of doing business. But as etiological science improves and attitudes toward coal change, one day a serious lawsuit may stick.

Ultimately, New York State Comptroller Thomas DiNapoli withdrew the DTE proposal, after getting limited concessions from the company. “As long-term shareholders, we are invested in the sustainability of our portfolio companies,” Mr. DiNapoli said in a statement about the proposal. “Given the current regulatory climate, an excessive reliance on coal can create serious risk to shareholder value.”

Too bad Vanguard isn’t more supportive. In a June 2014 release about its proxy voting, the company stated: “We typically abstained from voting on proposals that sought additional reporting or corporate policy changes on environmental or social matters.” In the case of the DTE proposal,Vanguard actually voted against it.

As an indexer who holds stocks forever, Vanguard’s CEO should be thinking long-term like Mr. DiNapoli. But Mr. McNabb seems more interested in keeping problems behind closed doors than making waves. He told the Philadelphia Inquirer that executives often call him about their governance. “They want to talk it out before it gets to a vote,” he explained. “Or before it gets to the press.”

Well, here’s a story that reached the press, Bill. Maybe you can send DTE a private message to stop polluting my neighborhood. Meanwhile, my wife will continue to cough as she goes up the stairs.

Lewis Braham is a freelance financial writer and the author of “The House That Bogle Built: How John Bogle and Vanguard Reinvented the Mutual Fund Industry” (McGraw-Hill, 2011).

First Published: December 28, 2014, 5:00 a.m.

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