Vanguard has dropped out of the Net Zero Asset Managers (NZAM) climate change initiative, citing a clash between its core index investment style and conflicting goals of the industry pledge.
In a statement released last week, the more than US$7.5 trillion passive fund giant says while collective industry efforts to address common issues have a place “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 favored by many Vanguard investors,” the release says. “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, headed by Tim Buckley, signed the global asset management agreement last year soon after NZAM was established at the end of 2020.
However, the second-largest fund manager in the world has faced pressure to take action against or divest from fossil fuel companies, for example, as significant passive holders of such assets.
“Index fund managers don’t choose the securities in a fund or dictate a portfolio company’s strategy or operations,” the statement says. “Instead, they buy and hold all securities included in the benchmark index and capture the return that the market provides.”
About 80 per cent of the approximately 30 million Vanguard investor assets are held in index funds.
Despite turning in the NZAM badge, the manager says it would continue to push for better disclosure of corporate climate risks.
The Vanguard move highlights some of the growing conflicts around environmental, social and governance (ESG) in the investment industry.
Last week, for instance, Vanguard copped a small fine from the Australian regulator over alleged misrepresentations of the tobacco content in a ‘screened’ global equities portfolio.
Meanwhile, the biggest fund manager in the world, BlackRock, has been hit by both sides of the argument recently – losing significant US government mandates for supposed ‘woke’ ESG policies while a hedge fund called for chief, Larry Fink, to resign for not doing enough on climate change.
The Florida state government, for example, stripped BlackRock of a US$2 billion contract this month with other Republican-controlled jurisdictions also threatening to follow suit.
At the same time, UK-based hedge fund Bluebell Capital, argued the US$8 trillion plus BlackRock has “alienated clients and attracted an undesired level of negative publicity” with its inconsistent ESG strategy.
Bluebell, which owns 0.01 per cent of BlackRock, says Fink should resign as chief while calling on the manager to “initiate a strategic review of (its) stance on ESG”.
BlackRock told US media: “In the past 18 months, Bluebell has waged a number of campaigns to promote their climate and governance agenda.
“BlackRock Investment Stewardship did not support their campaigns as we did not consider them to be in the best economic interests of our clients.”