American registered investment company Vanguard has faced a wave of criticism from stakeholders following the decision to leave The Net Zero Asset Managers (NZAM) initiative.
Last week, Vanguard Group announced that it would be pulling out of the investment-industry initiative on tackling climate change, citing reasons like wanting to demonstrate independence and clarify its views for investors.
Since then, the decision has been widely condemned, including by the former US vice president, now chairman of Generation Investment Management, Al Gore. An outspoken environmentalist, Gore called Vanguard’s decision to quit the world’s biggest climate-finance alliance “irresponsible and short-sighted.” He also suggested the asset manager, which oversees $7.1 trillion in client funds, was out of step with the “zeitgeist.”
Climate groups such as Reclaim Finance, a French non-profit, said the defection was proof Vanguard “was never serious about implementing its net zero commitment” in the first place. The Sunrise Project, another non-profit, said it expects Vanguard to face anger from some clients.
John Galloway, Vanguard’s global head of investment stewardship, was on a call with his team after the exit was announced and told staff that a concern now is employee safety given the risk of climate protests, according to a person with direct knowledge of the conversation. A spokesperson for the firm declined to comment about the call.
Casey Harrell, a senior strategist at The Sunrise Project, said that Vanguard customers “around the globe will be the ones who will suffer in the long term.”
Vanguard is now trying to play down the significance of last week’s decision to back out of the Net Zero Asset Managers initiative – a sub-unit of the Glasgow Financial Alliance for Net Zero (GFANZ). The coalition currently has 550 members overseeing a combined $150 trillion in assets. Vanguard’s defection marks a major blow to the trajectory of the coalition.
Following its decision, a spokesperson for Vanguard said it plans to “keep investors informed of our approach through thoughtful insights such as our climate research.” It also intends to engage with portfolio companies and policymakers and will continue to provide stewardship reports and regular climate reports, the spokesperson said.
But Vanguard’s defection has highlighted a current problem in the finance industry’s net zero claims. The fund manager has about 80% of its portfolio assets in index-tracking funds. As a result, Vanguard says it doesn’t “choose the securities in a fund or dictate a portfolio company’s strategy or operations.”
Vanguard isn’t alone in pointing out the challenges index managers face when it comes to net zero goals.
“Passive investing isn’t very compatible with net zero alignments,” said Hubert Keller, senior managing partner of Lombard Odier. “I have some sympathy for these large index-based investors that say, quite rightly, that as a passive investor I can’t force the real economy to change.”
NZAM has previously acknowledged the issue and responded with “the challenge” of how to treat index funds in the context of net zero targets will get more attention “in the coming months.”
Many of the world’s largest money managers have tended to exclude funds they define as passive from their emissions estimates. An analysis earlier this year of 30 major investment firms showed that none applied fossil-fuel restrictions to all their index-tracking funds, according to Reclaim Finance. Of those, 25 were GFANZ signatories, which at the time included Vanguard, as well as BlackRock and State Street.
Of the roughly £6.2 trillion that BlackRock oversees, some 27% was actively managed at the end of September. PwC expects the global market for assets under management to reach £119 trillion by 2025, with only 60% of that actively managed. “Passives will gain huge market share,” it said.
Vanguard said 96% of the funds it manages don’t align with net zero goals, and it now has no plan or commitment to change that.
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