Vanguard Quits Climate Alliance In Major Blow To Woke Investing

Tyler Durden's Photo
by Tyler Durden
Thursday, Dec 08, 2022 - 03:25 PM

In a mighty blow to Environmental, Social and Governance (ESG) investing, Vanguard, the world's second-largest asset manager, announced it's withdrawing from a major financial alliance against climate change: the Net Zero Asset Managers (NZAM) initiative.

NZAM, which Vanguard joined in 2021, bills itself as "an international group of asset managers committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner, in line with global efforts to limit warming to 1.5 degrees Celsius; and to supporting investing aligned with net zero emissions by 2050 or sooner."

Last month, Consumers' Research joined 13 state attorneys general in filing a complaint against Vanguard with the Federal Energy Regulatory Commission (FERC), charging that the firm was violating its agreement to control utility company shares passively.  

"Committing to net zero isn’t an abstract goal," wrote Will Hild, executive director of Consumers' Research, in a Dec. 1 Wall Street Journal op-ed. "The Net Zero Asset Managers Initiative requires its members to prescribe specific emissions targets for industry sectors, especially utilities."

"The International Energy Agency’s net-zero road map envisions eliminating fossil fuels from electricity generation by 2050. That would require every American utility to remake its operations radically."

Vanguard's exit comes at a time of increased saber-rattling and legal maneuvers by Republicans against investment firms pursuing woke agendas in general and anti-fossil-fuel agendas in particular.

Congressional hearings are in the works, and various state legislatures are readying anti-ESG measures. On Dec. 1, Florida CFO Jimmy Patronis announced the state would withdraw $2 billion in assets managed by BlackRock. "Florida's Treasury Division is divesting from BlackRock because they have openly stated they've got other goals than producing returns," said Patronis. 

Here are two key excerpts from Vanguard's statement about its withdrawal: 

"Industry initiatives [like NZAM] can advance constructive dialogue, but sometimes they can result in confusion about the views of individual investment firms. That has been the case in this instance, particularly regarding the applicability of net-zero approaches to the broadly diversified index funds favored by many Vanguard investors." 

"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."

That's welcome news. The idea that -- of all firms -- Vanguard would subordinate its investors' interests to those of an international climate change consortium was particularly disheartening. 

An industry maverick: Vanguard founder Jack Bogle is considered the father of the index fund (Photo: Vanguard)

Founded by the legendary Jack Bogle, the firm stands apart with a unique ownership structure in which Vanguard's mutual funds own the Vanguard Group. That structure positions the firm to put the interests of its investors first.

Overlaying an ESG agenda on fund management and proxy-voting betrays Bogle's founding vision, by using investor assets to pursue social goals -- at high risk of harming returns in the process.  

It remains to be seen just how far away from the ESG ledge that Vanguard is stepping. The firm said the exit from NZAM "will not affect our commitment to helping our investors navigate the risks that climate change can pose to their long-term returns."  

Malvern, Pennsylvania-based Vanguard reiterated its commitment to provide specific "products designed to meet net zero objectives." That's how it should be -- Vanguard and others should provide that warped investment approach only to those who specifically seek it out.     

Meanwhile, NZAM still counts most of the world's largest asset management firms among its roughly 290 signatories, including BlackRock, State Street, JPMorgan Asset Management and London-based Legal & General. Fidelity, Pimco and now Vanguard are three notable exceptions.   

As of Nov. 9, NZAM firms represented some $66 trillion in assets, according to the group. The loss of Vanguard -- the world's second-largest asset manager -- puts a $7 trillion dent in that figure. Here's hoping other firms follow Vanguard's lead in charting a new course that puts investors first.