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December 20, 2022updated 22 Dec 2022 1:11pm

Vanguard NZAM exit is opportunity for investors to vote with their feet

Vanguard pulled out of the Net Zero Asset Managers initiative. It’s now up to investors to decide if they still wish to work with them.

By Daniel Flatt

Vanguard, NZAM, greenwash, net zero
Vanguard is, at least, is no longer greenwashing its credentials by signing up to an initiative it likely never seriously expected to achieve. (Image by delpixel via Shutterstock)
  • Vanguard’s exit reflects the serious political pressures financial institutions are facing in the US…
  • … But the asset manager has never shown any real vigour for mitigating climate change.
  • Investors need to divest if they feel their climate principles don’t align .

It caused quite a stir. Vanguard Group (Vanguard), the world’s second largest asset manager – and world’s largest mutual fund manager – by assets dropped a large financial bomb right in the heart of the climate change movement.

On Dec 7, the Pennsylvania-based investor, with $7trn plus in AUM, said it was pulling out of the vaunted Net Zero Asset Managers (NZAM) initiative, a collective of fund managers committed to reaching net zero emissions targets by 2050.

NGOs were quick to spit venom. Jessye Waxman  of the Sierra Club’s Fossil-Free Finance campaign, said: “Vanguard has never been serious about mitigating climate risk in its portfolios or for its clients, adding, “Joining the initiative was just an exercise in greenwashing.”  Many others, including Lara Cuvelier of Reclaim Finance, shared similar sentiments.

For Vanguard, it was an exercise in providing “clarity” to its investors about the role of index funds and how, the manager thinks about “material risks”, including climate. It’s central plank, and its implicit criticism of the NZAM, was that it needed to speak with an “independent” voice.

In truth, Vanguard has never shown any real vigour for mitigating climate change. It remains the largest investor in six of the world’s top ten polluting companies and, as Capital Monitor pointed out earlier this year, there’s always been a whiff of smokes and mirrors about its emissions reporting.

Although it technically factors in Scope 3 emissions – those connected with a company but outside its direct control – it does not include “fund investments”, where the majority of its financed emissions sit. In other words, it doesn’t report on the one aspect of its business that could have a material difference on carbon emissions.

You might be forgiven for having some sympathy for Vanguard. Its exit speaks to some of the serious political pressures financial institutions are facing in the US. Much has been written about the rather unseemly partisan division between Democrats and Republicans over the reach ESG should have in US citizens’ everyday lives.

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The Republicans  believe efforts to fight climate change and improve diversity have gone too far. Influential states including Texas and West Virginia have passed laws preventing state government and pension plans from doing business with, or investing in, asset managers considered to be “boycotting” fossil fuel.

Either way you view it, the news is seen as a blow for NZAM’s ability to manage the egos of the some of the world’s most influential investors. As the FT wrote recently:

“The exit from the initiative by Vanguard … [hits] efforts to organise industries to move away from fossil fuels, despite the fact Vanguard insisted it “will not affect our commitment to helping our investors navigate the risks that climate change can pose to their long-term returns”.

Who will wave goodbye to Vanguard?

But should this be the conclusion investors should draw? Capital Monitor believes otherwise. In fact, Vanguard’s self-deselection represents the perfect opportunity for investors committed to net zero to vote with their feet. If Vanguard’s position does not jibe with their own, then it’s in their gift to find an alternative asset manager to manage their money.

And for that, Vanguard deserves some credit. Whether it was done kicking and screaming, it, at least, is no longer greenwashing its credentials by signing up to an initiative it likely never seriously expected to achieve.

Capital Monitor has always taken the view that it should not judge an institution on its values, but that it should be judged on whether it is achieving on those values and the targets that come with it.

The biggest threat to reaching net zero is not that some choose not to aspire to it, but that many pretend they do, hoodwinking investors into thinking their values align. At least Vanguard can no longer be criticised for that. 

If NGOs think their job is done by attacking Vanguard’s decision, it isn’t. In fact it’s only just begun: they should be looking very closely at fund flows into and out of the asset manager’s many funds and establishing  which climate committed asset owners are still parking their money with it. This is the real test of commitment to net zero.

And in light of how Vanguard is structured, this is a meaningful endeavour. In contrast to most publicly-owned investment firms, Vanguard is owned by its funds and the funds are owned by the shareholders. In other words, asset owners with investments in Vanguard funds are technically shareholders of the holding company.

In short, there was always going to be some fallout from a prominent fund manager over climate. Now is the time to see how asset owners respond.

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