Vanguard said it is leaving the Net Zero Asset Managers initiative, an international carbon-reduction pact that has become a lightning rod for criticism of environmentally motivated investing.
The move comes as Vanguard has been facing intensifying political pressure over its ESG initiatives—efforts to offer investments aligned with certain environmental, social, or corporate governance factors.
In late November, a coalition of 13 state attorneys general filed a motion with the Federal Energy Regulatory Commission asking it to block Vanguard’s request to extend its authorization to purchase large quantities of stock in public utilities.
The attorneys general represent solidly Republican states, many with large fossil-fuel industries. They argued that Vanguard’s public commitments to combating climate change, including its participation in the Net Zero Asset Managers (NZAM) initiative, “have at the very least created the appearance that Vanguard has breached its promises to the commission by engaging in environmental activism and using its financial influence to manipulate the activities of the utility companies in its portfolio.”
They asked FERC for a hearing to determine whether Vanguard’s extension request is in the public interest.
Even though Vanguard has bowed out of the climate initiative, which sets 2050 as a target for attaining net-zero carbon emissions, the attorneys general appear unlikely to withdraw their motion.
“Certainly we wouldn’t back off the letter just because the company says today [it’s withdrawing from NZAM] because we could have a new policy from Vanguard tomorrow,” said Stewart Huntington, a spokesman for the office of the attorney general in South Dakota, one of the states behind the motion.
A spokeswoman for the Indiana attorney general declined to comment beyond a press release her office issued. Officials in the other 11 states didn’t immediately respond to requests for comment though some issued statements hailing Vanguard’s withdrawal from the carbon-reduction pact.
For Vanguard’s part, a company spokeswoman didn’t address a question about the extent to which the decision to quit the climate initiative was prompted by political pressure. The spokeswoman, Alyssa Thornton, offered a repackaged version of parts of the company’s public announcement that it was withdrawing from the initiative:
“Industry initiatives such as NZAM can advance constructive dialogue, but they can also create confusion about the views of individual firms. We want to provide greater clarity that Vanguard speaks independently on important matters such as climate risk. Following 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.”
A spokeswoman for NZAM said the group “regrets that Vanguard has taken the action of withdrawing from the initiative,” adding that “we wish them well in their journey to integrate climate change and other sustainability risks into all that they do.”
“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,” said Kirsten Snow Spalding, vice president of the Ceres Investor Network at the nonprofit Ceres, a founding partner of the NZAM initiative.
Spalding, along with the hundreds of asset managers that have signed on to NAZM, argue that climate risks have become inextricably linked with companies’ financial performance. In that framing, advisors who ignore climate factors in developing an investment strategy are overlooking crucial considerations that will inevitably weigh on a company’s financial performance and share price.
But an increasing backlash among Republican politicians and the fossil-fuel industry has sought to cast ESG investing—particularly the “E”—as a “woke” exercise in virtue signaling, or as something even more cynical.
Writing in an opinion article in The Wall Street Journal, Will Hild, executive director of Consumers’ Research, a group that joined the AGs’ motion to block Vanguard’s utility investing, suggested that Vanguard and other big asset managers are playing the climate change card as they pursue money-management roles within blue states’ large public pensions, which he said would amount to a “major conflict of interest.”
The past few months have seen a number of attacks on ESG investing, including moves by Florida and Texas to block state pension funds from investing in companies and funds engaged in ESG strategies. Last month, the attorney general of Kentucky launched an investigation into Vanguard and State Street Bank, suggesting that their ESG strategies could violate the state’s consumer protection laws. There are many other similar examples.
Opponents of climate commitments like NZAM point to rising energy prices and warn that heavyweights such as Vanguard are pressuring utilities to shift to greener production methods that will drive consumer costs higher still while also benefiting China’s economy, which is heavily involved in the production of items like solar panels and wind turbines.
Under FERC’s rules, asset managers aren’t allowed to try to influence how utilities operate, but critics like Hild argue that Vanguard,
and State Street (the latter two are NZAM signatories) have enormous clout they can use to pressure energy companies into climate commitments.
“Vanguard’s investment has been anything but passive, actively pushing corporate managements to pursue net-zero targets and shutter coal and natural-gas electricity generation,” Hild wrote.
Vanguard is requesting a three-year extension from FERC on an arrangement it secured in 2019 authorizing the company and its affiliates and subsidiaries to purchase up to 20% of a utility, or up to 10% within a given Vanguard fund.
As a practical matter, if the AGs press forward and FERC denies Vanguard its utility authorization, the fund giant could probably find a workaround, according to Dan Wiener, chairman of Adviser Investments and a leading Vanguard authority.
“It strikes me that there are any number of smart people on Wall Street who would be able to come up with a synthetic product that mimics ownership in utilities that Vanguard could use in lieu of actual shares in their index funds if they weren’t able to get their waiver,” Wiener said. “If Vanguard can’t get the waiver then they buy shares up to the limit then use a synthetic to get their exposure.”
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