Stockholm (NordSIP) – In the latest blow for ESG and sustainable investment initiatives, Vanguard, the largest provider of mutual funds in the world, announced it was leaving the Net Zero Asset Managers initiative (NZAM).
“[C]onsistent with our commitment to promoting portfolio company disclosure of material financial risks, Vanguard joined the Net Zero Asset Managers initiative (NZAM) in 2021. Such industry initiatives can advance constructive dialogue, but sometimes they can also 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 favoured by many Vanguard investors. Therefore, after a considerable period of review, 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,” Vanguard’s press release explained.
The Net Zero Asset Managers Initiative
NZAM was created as an initiative by thirty asset managers representing US$9 trillion in assets under management (AUM) at the end of 2020. The initiative includes BMO Global Asset Management, Calvert Research and Management, Fidelity International, Handelsbanken Fonder AB, Legal & General Investment Management, M&G plc, Nordea Asset Management, Robeco, Sarasin & Partners LLP, Schroders, Swedbank Robur, UBS Asset Management, Wellington Management, and WHEB. It also counts with the support of the Asia Investor Group on Climate Change (AIGCC), the Carbon Disclosure Project (CDP), Ceres, the Investor Group on Climate Change, the Institutional Investors Group on Climate Change (IIGCC) and the PRI. Vanguard joined NZAM in 2021.
Members of NZAM commit to supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner, in line with global efforts to limit global warming to 1.5°C. Beyond their general commitment to net-zero emissions, members of the initiative also agree to set interim targets for the share of assets that should be managed in line with this goal over the coming thirty years. To support progress along these milestones, signatories also agree to review their performance and targets every five years, increasing the proportion of AUM covered until 100% of assets are included.
Why Quit NZAM?
There appear to be two complementary logics for why Vanguard left NZAM. On the one hand, the logic that Vanguard seems to be hinting at is that it specialises in passive diversified funds. One of the issues of ESG funds is that by virtue of the exclusions applied during their creation they can often end up focusing on a relatively narrow investment universe. Although it never spells it out, the argument that Vanguard seems to be making is that the two approaches are incompatible.
“Index fund managers don’t choose the securities in a fund or dictate a portfolio company’s strategy or operations. Instead, they buy and hold all securities included in the benchmark index and capture the return that the market provides,” Vanguard press release explains. “In the words of our founder, Jack Bogle, rather than searching for the needle in the haystack, buy the whole haystack. It’s an approach that has helped build wealth for tens of millions of everyday investors. Importantly, indexing relies on efficient and fair capital markets,” Vanguard added on this occasion.
The problem with this argument is that it makes Vanguard look at best distracted, at worst incompetent. Surely they should have done some due diligence ahead of joining the NZAM alliance and realised this incompatibility. Because incompetence is not really an adjective the industry is used to apply to Vanguard, a third alternative inevitably comes up: they don’t really care about climate risk and were swayed by something else.
In response to the announcement, Jessye Waxman, Senior Campaign Representative with the Sierra Club’s Fossil-Free Finance campaign, commented that “Vanguard has never been serious about mitigating climate risk in its portfolios or for its clients. The decision to leave the Net Zero Asset Managers Initiative is a confirmation of what Vanguard’s intentions have been all along: joining the initiative was just an exercise in greenwashing. Climate-related financial risks aren’t going anywhere. Vanguard’s move is cowardly, short-sighted, and places the asset manager even further behind its peers.”
Bowing to Political Pressure?
A lighter version of this reaction does not directly claim Vanguard was greenwashing its way into sustainable investors’ heart, but rather claim that it was not particularly committed to the initiative and was easily swayed away from this path once political winds started blowing in the opposite direction.
“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 sustainability nonprofit Ceres, was quoted by Reuters as commenting on this occasion.
The specific instance of political pressure Spalding is referring to is the rising chorus of reactionary Republican voices coming together to oppose what they call “woke capitalism”. NordSIP recently had the opportunity to hear about the pushback that sustainable investors in the USA are getting these days.
“There has been an attack on ESG, [which] has become a very politicised issued in the USA. ESG investors have been labelled ‘Woke Capitalists’,” Michael Garland, Assistant Comptroller for Corporate Governance and Responsible Investment, Office of the New York City Comptroller, said at the SkyTop Conference on ESG Impact Against the Backdrop of Geopolitics, which took place in Stockholm on Thursday, October 27th.
“There are a number of Republican-led states which are cutting their pension funds or their state’s business relationships with financial institutions that have set decarbonisation rules. They are not allowed to underwrite bond issuances for the public sector and their pension funds are not allowed to hire some of these firms as investment managers. I think it is having an impact in the financial community and some of the firms might be starting to walk back some of their commitments,” Garland explains.
On the occasion of Vanguard’s announcement, Garland’s boss, the New York City comptroller, Brad Lander, remarked to Responsible Investor that Vanguard’s withdrawal from NZAM initiative was a “misguided about face”.
Not a Good Colour
Whatever the reason, leaving the NZAM initiative is not a good colour on Vanguard. Whether it was due to incompetence, greenwashing or cowardice in the face of political pressure, this entire embarrassment could have been avoided had Vanguard just not joined in the first place.
