By Vitalii Vodolazskyi @ Shutterstock.com
Back in March of 2021, Vanguard joined what is known as the Net Zero Asset Managers (NZAM) initiative, which is part of the United Nations’ “Glasgow Financial Alliance for Net Zero” (aka GFANZ). GFANZ is “committed to accelerating the decarbonization of the economy.” Raising environmental concerns above best serving customers could violate Vanguard’s fiduciary duties. Now, possibly in light of that, Vanguard has backed away from its commitments to NZAM. The Wall Street Journal’s editorial board explains:
Emperors of finance may finally be discovering that climate virtue-signaling isn’t without costs. Credit to Vanguard last week for pulling out of the Net Zero Asset Managers (NZAM) pledge to purge fossil fuels and CO2-emitting companies from its funds.
The NZAM initiative is part of the United Nations’ “Glasgow Financial Alliance for Net Zero” to conscript private capital to drive the left’s climate goals. Former Bank of England Governor Mark Carney cajoled most of the largest banks and investment managers to join the alliance last year, and they might not have realized the backlash they were courting.
Asset managers including Vanguard and BlackRock committed “to support the goal of net zero greenhouse gas (‘GHG’) emissions by 2050, in line with global efforts to limit warming to 1.5°C (‘net zero emissions by 2050 or sooner’)” and to “support investing aligned with net zero emissions by 2050 or sooner.”
The pledge also required asset managers to “create investment products aligned with net zero emissions by 2050 and facilitate increased investment in climate solutions.” How does this net-zero pledge comport with the strategy of passive investing in index funds, which Vanguard founder Jack Bogle pioneered? Short answer: It doesn’t.
As Vanguard explained in its statement, “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 says the NZAM created confusion about the “applicability of net zero approaches to the broadly diversified index funds favored by many Vanguard investors.”
Confusion? The initiative’s explicit intent is for asset managers to use the tens of trillions of dollars they control—largely via index funds—to punish companies that don’t adopt the climate lobby’s net-zero goals. By its very terms, the initiative would require asset managers to sell their fossil-fuel holdings.
Vanguard may have also decided that potential legal liabilities of membership in the net-zero club isn’t worth it. Republican state Attorneys General warned BlackRock in a letter this summer that the “coordinated conduct with other financial institutions to impose net-zero also raises antitrust concerns” and runs counter to their fiduciary obligations.
Whatever the reason for Vanguard’s defection, it’s welcome news. Maybe more asset managers will follow.
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