Vanguard Group Inc. is under pressure to reassure stakeholders that it still cares about the climate, after becoming the target of fierce criticism from high-profile environmental advocates including Al Gore.
The former US vice president, who now chairs Generation Investment Management, called Vanguard’s decision to quit the world’s biggest climate-finance alliance “irresponsible and shortsighted.” Gore also suggested the asset manager, which oversees $7.1 trillion in client funds, was out of step with the Zeitgeist.
It’s a sentiment that was echoed by others, including New York City comptroller Brad Lander, while climate groups such as Reclaim Finance, a French nonprofit, said the defection was proof Vanguard “was never serious about implementing its net-zero commitment” in the first place. The Sunrise Project, another nonprofit, 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.
Vanguard is now trying to rein in the fallout of last week’s decision to back out of the Net Zero Asset Managers initiative, which is a sub-unit of the Glasgow Financial Alliance for Net Zero. Earlier this year, GFANZ proudly announced that the coalition had grown to 550 members overseeing a combined $150 trillion in assets. Vanguard’s defection marks a major blow to that growth narrative.
A spokesperson for the asset manager said it plans to “keep investors informed of our approach through thoughtful insights such as our climate research.” Vanguard also intends to engage with portfolio companies and policy makers, and will continue to provide stewardship reports and regular climate reports, the spokesperson said.
But Vanguard’s defection has shone a torch on a weak link 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 alignment,” 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.”
NZAMi has acknowledged the issue, and said in November that “the challenge” of how to treat index funds in the context of net-zero targets will get more attention “in the coming months.”