Vanguard’s exit unlikely to trigger mass defections from net-zero initiative

Vanguard, the world’s second largest investment manager, may have left the Net Zero Asset Managers (NZAM) initiative, but big name investors remain on board. 

The decision of Vanguard, the world’s second largest investment manager, to pull out of the NZAM net-zero initiative, has sparked concerns that others may follow suit. But those committed to the alliance say the financial – as well as ethical – case for its aims remains strong. 

Vanguard backed the initiative in 2021, joining a host of well-known names in asset management in committing to supporting NZAM’s goal of achieving net-zero greenhouse gas emissions by 2050.

However, Pennsylvania-based Vanguard and other US asset managers have been subject to pressure on multiple fronts from some investors and Republican politicians to place less reliance on ESG criteria when making investments.  

Some say that considering ESG factors in investment decisions negatively affects the ability of companies such as Vanguard to maximise returns for shareholders and violates anti-trust rules. Others are unhappy that by signing up for net zero initiatives, fund managers are shunning fossil fuel investments at a time when energy security is paramount.     

Vanguard blamed “confusion about the views of individual investment firms” resulting from initiatives like NZAM for its withdrawal. “That has been the case in this instance, particularly regarding the applicability of net zero approaches to the broadly diversified index funds favoured by many Vanguard investors,” the company said in a statement.  

“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,” it added. The company said it would pursue its own climate change strategy. 

Political pressure

Sustainability NGO Ceres, a founding partner member of NZAM, said the initiative regretted Vanguard’s withdrawal. “It is unfortunate that political pressure is impacting this crucial economic imperative and attempting to block companies from effectively managing risks – a crucial part of their fiduciary duty,” Kirsten Snow Spalding, a vice president at Ceres said. 

Others environmental organisations were scathing. Jessye Waxman, senior campaign representative with the Sierra Club’s Fossil-Free Finance campaign, said Vanguard had “never been serious about mitigating climate risk in its portfolios or for its clients” and that “joining the initiative was just an exercise in greenwashing” for Vanguard. The Sierra Club said that, despite being a member of the NZAM initiative since March 2021, Vanguard had committed to align less than 5% of its assets under management (AUM) with net-zero goals. 

The departure of Vanguard and its AUM of around $7trn from NZAM may not help efforts to broaden the initiative’s reach, but it isn’t seen as fatal.

NZAM still has almost 300 signatories whose total assets totalled $66trn, as of November 2021. They include a wide spectrum of financial institutions from the world’s largest asset manager Blackrock, to boutique impact investors. 

European players voice support 

Eoin Fahy, head of responsible investing and chief economist at Dublin-based KBI Global Investors – an active equities investor and an NZAM signatory – told Impact Investor he did not expect a wave of departures following Vanguard’s exit, given climate-change investing was driven by the need to protect future profits, as well as ethical concerns. 

“The idea that membership encourages companies to do things they don’t want to do is a fundamental misunderstanding of what the Net Zero Asset Managers initiative is trying to achieve. Most signatories have joined because they believe climate change may do significant damage to the global economy and, therefore, to their financial returns,” he said. 

Large passive indices-based managers such as Vanguard face sterner challenges in adapting to net-zero strategies than active equities investors like KBIGI, as they need to convince a big investor base to stay on board if, for example, they switch to tracking sustainable investment benchmark indices – a potential problem if some rivals aren’t doing it. But Fahy said that challenge shouldn’t be insurmountable. 

“Why wouldn’t an investor take steps to reduce emissions in its portfolio, and, perhaps more importantly, to encourage companies in which it invests to take measures to reduce their emissions? For long-term investors such as pension funds, arguably the single biggest threat to financial returns on a 30-year view could very well be climate change,” he said. 

Fahy also doubted that the backlash over ESG investing in the US would spread to Europe, where there is less debate over its value. That echoes the view of those in the industry who recently spoke to Impact Investor, who said most European investors accept the benefits of alignment between investment considerations and environmental ones. 

Growing interest in net-zero strategies 

Other related climate change initiatives have also come in for criticism from those with reservations over ESG investing. The Glasgow Financial Alliance for Net Zero (GFANZ), a product of the 2021 COP26 climate change conference, recently said member alliances – which include NZAM – would now only be encouraged, rather than required, to partner with the UN’s Race to Zero. That was seen as an effort to stave off defections due to pressure in the US.  

However, Sarah Gordon, CEO of the UK-based Impact Investing Institute, told Impact Investor in November, that such collaborative coalitions were necessary to make progress towards net zero and were garnering rather than losing members overall. GFANZ now has over 550 members compared to 450 at the time of COP26. 

KBIGI’s Fahy believes investor pressure is helping to make a difference to the speed at which net zero strategies at investee companies are being introduced. Just over half of holdings, across all KBIGI portfolios, now have a net zero target approved by the Science Based Target Initiative or have submitted one and are waiting for approval. “Three years ago, that number was very close to zero,” he said.