Fund management giant ($7 trillion under management) Vanguard has been doing some rethinking.
[Vanguard] said on Wednesday that it was resigning from the Net Zero Asset Managers [NZAM] initiative, whose members have committed to achieving net zero carbon emissions by 2050.
The NZAM initiative was formed by a group of asset managers (with $66 trillion under management as of early November). The signatories’ commitment extends, in ways set out here, to their investment portfolios.
The FT effectively links Vanguard’s decision to (but of course) wicked Republicans. It was taken, Brooke Masters and Patrick Temple-West explain, “at a time when Republicans in the US have stepped up their attacks on financial institutions that they say are hostile to fossil fuels.”
To be fair, it’s certainly possible that is a part of why Vanguard acted in the way that it did, not least, perhaps because of this (via the FT):
Last month, a group of Republican attorneys-general asked the Federal Energy Regulatory Commission not to renew Vanguard’s authorisation to buy shares in US utilities. They cited its NZAM membership as evidence that it was trying to influence corporate policy rather than being a passive investor.
And that’s something Vanguard is not meant to do. Will Hild, writing in the Wall Street Journal, explains:
Under FERC rules, asset managers aren’t permitted to meddle in a utility’s operations. Vanguard is aware of this; that’s why the company promised FERC at its August 2019 authorization hearing it would be a passive investor in the utilities in which it holds shares. The commission granted authorization, and Vanguard’s investment has been anything but passive, actively pushing corporate managements to pursue net-zero targets and shutter coal and natural-gas electricity generation.
I touched on this story in last week’s Capital Letter.
But beyond the specific controversy over FERC, the fact that politicians on the right have belatedly woken up to the fact that, by backing net zero policies, investment institutions are committing themselves (and, potentially, client money) to matters that are profoundly political is probably not something that Vanguard has found too comfortable. It may have helped the company think again about the implications of the stance it has taken.
The FT:
Vanguard, which mainly manages passive funds that track market indices, said the alliance’s full-throated commitment to fighting climate change had resulted “in confusion about the views of individual investment firms”.
“We have decided to withdraw from NZAM so that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks — and to make clear that Vanguard speaks independently on matters of importance to our investors,” the Pennsylvania-based company said in a statement.
That makes sense. If an institution is dedicated to serving the individual investment needs of clients with, often, very different priorities, it is hard for it to claim that it can tailor its approach to their different needs if it is bound by commitments that could have a major investment impact across all its portfolios.
Vanguard had also signed up with the Glasgow Financial Alliance for Net Zero (Gfanz), an umbrella climate finance organization, which was midwifed last year by Mark Carney. I have written about Gfanz here. Vanguard will also be pulling out of Gfanz, which is beginning to run into separate problems, but that’s a topic for another time.
All this said, Vanguard has made the following clear, the FT reports:
It will continue to offer products that use environmental, social and governance investing factors and net zero products to investors who want them. Vanguard will also still ask the companies it invests in how they plan to address climate risks.
It will be interesting to see if those questions are pro forma or are designed to carry some weight.
Meanwhile, in another reminder that by getting involved in climate policy, asset managers risk opening something of a Pandora’s box, there’s this (via the FT):
Environmental groups accused Vanguard of duplicity after its announcement.
“Vanguard has never been serious about mitigating climate risk,” said Jessye Waxman, an official with the Sierra Club’s fossil-free finance campaign. For Vanguard, “joining NZAM was just an exercise in greenwashing”.