Vanguard’s climate retreat draws ire from some customers

Vanguard’s recent move to distance itself from climate-conscious investing received support from government leaders opposed to ESG, but the firm is now facing a rebuff from some of its clients.

Earlier this week, Vanguard received at least 1,400 copies of an official letter from the Sierra Club signed by Vanguard investors. The letter alleges that by withdrawing from the Net Zero Asset Managers initiative and not supporting shareholder decisions on climate change, the firm is violating its fiduciary obligations to clients. The response highlights that it will be difficult for large asset managers to avoid harsh criticism from ESG proponents, detractors, or both, as the lack of a firm stance on climate change is seen as a stance in itself.

“I expect Vanguard, as my confidant, to live up to their duty of loyalty and discretion in their decisions,” the letter said. “Unfortunately, Vanguard is not currently managing the climate change risk to my investment, potentially violating both of these fiduciary responsibilities.”

In December, Vanguard announced it was pulling out of NZAM. The decision was made to clarify the company’s role as an index fund provider. Industry initiatives such as NZAM “can promote constructive dialogue, but they can sometimes also lead to confusion among individual investment firms,” ​​Vanguard said.

The exit coincided with pressure from Republican groups opposed to using ESG considerations in investing. Lawmakers in Texas were quick to support Vanguard’s exit from NZAM, granting the company a reprieve from being questioned at ESG’s concerns hearing, which included testimony from BlackRock and State Street representatives.

Vanguard noted that it views climate change as a significant financial risk, as stated in a written response to the Sierra Club’s letter.

“As an investor-owned asset manager, Vanguard is committed to maximizing our clients’ returns and giving them the best chance of investment success,” the firm said in a statement. “As we have long stated, we believe that climate change poses a significant risk to companies and their shareholders, and we are committed to continuing to help our investors navigate its impact on their long-term financial success.”

The investors who signed the letter demanded that the firm develop a comprehensive plan to address climate risks. This will include proxy voting guidelines that will push portfolio companies to reduce greenhouse gas emissions in line with the 1.5 degree Celsius global warming cap, and “adopt and apply rigorous climate risk criteria and analysis across their entire portfolio.”

The author of the Sierra Club letter, Paul Rissman, was the Executive Vice President of AllianceBernstein until his retirement in 2008 and is currently a Director of the Sierra Club Foundation.

“Vanguard is the largest shareholder in the world,” Rissman said. “If anyone can change corporate behavior, it’s Vanguard – and they refuse to do it. They repeat over and over again: “We are not in the business of changing corporate behavior” … But this is part of their fiduciary duties.

Rissman said while the company has pointed to the material risks associated with climate change, its history of proxy voting on climate change doesn’t match that.

“They think that if companies recognize the risk of climate change, they will automatically do something about it,” he said. “It has never been established. And… they don’t focus on systemic risks. Climate change will affect the entire economy… It will affect almost all investments.”

Meanwhile, the firm BlackRock, which has come under the most scrutiny from the anti-ESG camp, has also come under fire for its role in climate change. Last September, for example, New York City Comptroller Brad Lander mentioned the gulf between the company’s stated climate stance and its portfolio holdings. Lander asked BlackRock to clarify its zero net income goals for all of its investments.

The letter campaign Vanguard is facing is potentially the first step in a larger action some of its clients will take, Rissman said.

“The point of this whole project is to create a paper compliance trail,” he said. “If Vanguard ignores its beneficiaries, this is a gross violation of fiduciary duties. We want to see what happens.”

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