Vanguard, one of the largest investment managers in the world, announced today that it is withdrawing from the Net Zero Asset Managers initiative (NZAM), a major multi-trillion dollar group of investment managers committed to supporting the goal of net zero greenhouse gas emissions by 2050.
In a statement announcing the withdrawal, Vanguard said that the decision was made in order to provide its 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 matters of importance to our investors.”
Launched in December 2020 with a group of 30 asset managers representing approximately $9 trillion of assets under management (AUM), the coalition has grown rapidly, reaching nearly 300 firms with $66 trillion in AUM, as of November 2022. Vanguard joined NZAM in March 2021, and, with over $7 trillion in assets, is among its largest signatories.
Signatories to NZAM agree to a series of commitments, including working with asset owner clients on decarbonization goals, setting and reviewing interim targets for a proportion of assets to be managed in line with net zero by 2050, tracking portfolio emissions, prioritizing 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 zero by 2050 portfolio goal, among others.
In its statement, Vanguard explained that as an asset manager of primarily passive investment funds – over 80% of the firm’s clients’ assets are invested through index funds – its participation in NZAM resulted in confusion about the views of the firm, “particularly regarding the applicability of net zero approaches to the broadly diversified index funds favored by many Vanguard investors.”
Vanguard said:
“This change in NZAM membership status will not affect our commitment to helping our investors navigate the risks that climate change can pose to their long-term returns. We will continue to provide investors the information and products they need to make sound investment choices, including products designed to meet net zero objectives.”
The investment manager also said that it will continue to interact with portfolio companies to understand how they address climate risk, and that it will report on its climate risk efforts.
Vanguard’s announcement comes as several financial services companies reportedly face challenges stemming from their participation in climate action-associated initiatives. NZAM is part of the Glasgow Financial Alliance for Net Zero (GFANZ), a UN-backed umbrella group of net zero-focused financial sector coalitions, which also includes 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 (PAAO).
After reportedly facing pressure from signatories of the various coalitions, GFANZ recently announced that it would drop one of its key conditions of requiring a commitment to the UN’s climate action campaign, Race to Zero. Race to Zero’s initial requirements included pledging to reach net zero by 2050 and to an interim 2030 target, explaining the actions necessary to achieve the goals, and committing to report on progress against the targets. Earlier this year, Race to Zero tightened its criteria for members, adding a requirement to publish a transition plan within 12 months of joining the campaign, as well as a commitment to reach net zero across all emissions scopes. The “all emissions scopes” requirement included financed and portfolio emissions for financial institutions. The requirements also restricted members’ development and financing of new fossil fuel assets.
The strict Race to Zero criteria reportedly challenged many GFANZ’s members’ ability to remain in the group, either due to restrictions to their ability to finance fossil fuel companies as energy security concerns over the past few months have caused threats of shortages and price spikes, as well as potential legal issues, with concerns that the lobbying requirements or fossil fuel-related criteria could conflict with institutions’ fiduciary duties.
Participation in the groups have also resulted in political pressure one some firms. One of the key claims made by several U.S. Attorneys’ General in a letter to BlackRock, which sits on the GFANZ steering committee, was that the firm’s commitment to the initiative were not aligned with its fiduciary role.
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