Vanguard, one of the world's largest investment managers, stated that it is resigning from the Net Zero Asset Managers project (NZAM), a major multi-trillion dollar consortium of investment managers dedicated to achieving net zero greenhouse gas emissions by 2050.
In a statement announcing the withdrawal, Vanguard explained that the decision was made to provide investors with "clarity... 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 issues that are important to our investors."
Initiated in December 2020 with a group of 30 asset managers representing around $9 trillion in assets under management (AUM), the alliance expanded swiftly by November 2022 to include almost 300 firms with $66 trillion in AUM. Vanguard joined NZAM in March 2021 and, with over $7 trillion in assets under management, is one of its major signatories.
Signatories to NZAM agree to a series of commitments, such as working with asset owner clients on decarbonization goals, setting and reviewing interim targets for a proportion of assets to be managed consistent with net zero by 2050, tracking portfolio emissions, prioritising the achievement of emissions reductions in the sectors and companies in which they invest, and implementing a stewardship and engagement strategy – including a voting policy – consistent with a net z target.
As an asset manager of primarily passive investment funds – over 80% of the firm's clients' assets are invested through index funds – Vanguard explained in a statement that its participation in NZAM led to confusion regarding the firm's views, ", particularly regarding the applicability of net zero approaches to the widely diversified index funds preferred by many Vanguard investors."
This change in NZAM membership status will not affect our commitment to assisting our investors in navigating the risks posed by climate change to their long-term returns. We will continue to provide investors with the knowledge and tools they require to make wise investment decisions, including solutions geared to satisfy net zero objectives."
In addition, the investment manager stated that it will continue to contact with portfolio firms to see how they address climate risk and will report on its climate risk actions.
Several financial services organizations are apparently facing difficulties due to their engagement in climate action-related activities, prompting Vanguard's declaration. The Net Zero Asset Owner Alliance (NZAOA), the Net Zero Banking Alliance (NZBA), the Net Zero Financial Service Providers Alliance (NZFSPA), the Net Zero Insurance Alliance (NZIA), the Net Zero Investment Consultants Initiative (NZICI), and the Paris Aligned Asset Owners Initiative (PAAOI) are also members of the Glasgow Financial Alliance for Net Zero (GFANZ), an UN-backed umbrella group of net zero-focused financial sector coalitions (PAAO).
Participation in the groups has recently resulted in political pressure being exerted on a number of businesses. For instance, one of the primary allegations made by numerous U.S. Attorneys General stated in a letter to BlackRock, a member of the GFANZ steering committee, that the firm's commitment to the program was not consistent with its fiduciary responsibilities.
Additionally, Vanguard has been the focus of these operations. Several of the firm's assets were listed on a list of funds potentially subject to divestment by Texas Comptroller Glenn Hegar, based on criteria including a connection to climate-focused organizations such as the NZBA or NZAM. Several Republican Attorneys General protested Vanguard's application to the Federal Energy Regulatory Commission (FERC), which would allow the asset manager to purchase a substantial number of shares in utility companies, citing its NZAM involvement, late last month.
Politicians of the Republican party were ready to claim credit for the Vanguard statement. Utah Attorney General Sean D. Reyes called NZAM "a multi-national banking coalition whose mandates compromise fiduciary duties and minimise shareholder profits in exchange for a radical environmental agenda." Kentucky Attorney General Daniel Cameron called the move a "victory" and "an important step toward stopping ESG-driven policies."
In a statement issued after Vanguard's announcement, Kirsten Snow Spalding, vice president of the Ceres Investor Network at NZAM founding partner Ceres, expressed regret at the withdrawal and cited "political pressure" that is "attempting to prevent companies from effectively managing risks — a crucial part of their fiduciary responsibility."
Snow Spalding adds the following:
"While Net Zero Asset Managers recognise there are challenges associated with measuring the alignment of passive portfolios with a 1.5 degree Celsius temperature rise limit and moving the companies in index funds to rapidly decarbonize, these challenges can only be met with strong commitments to transitioning to a zero emissions economy by investors, companies, and policymakers."
GFANZ recently declared that it would eliminate one of its core requirements demanding a commitment to the United Nations' climate action programme, Race to Zero, due to pressure from coalition signatories. The initial conditions of Race to Zero comprised a pledge to attain net zero emissions by 2050 and an interim target by 2030, an explanation of the activities necessary to accomplish the goals, and a commitment to report on progress toward the goals. This year, Race to Zero added a requirement for participants to submit a transition plan within 12 months of joining the campaign, as well as a pledge to achieve net zero emissions across all emission scopes. The "all emission scopes" requirement for financial institutions covered funded and portfolio emissions. In addition, the requirements restricted the development and financing of new fossil fuel assets by members.
The strict Race to Zero criteria reportedly challenged the ability of many GFANZ members to remain in the group, either due to restrictions on their ability to finance fossil fuel companies as energy security concerns in recent months have caused threats of shortages and price spikes, or due to potential legal issues, with concerns that the lobbying requirements or fossil fuel-related criteria could conflict with institutions' fiduciary responsibilities.
Despite the latest modification to the membership requirement, all GFANZ alliances remain a part of Race to Zero and continue to adhere to their respective, Race to Zero-approved standards.