Vanguard announced earlier this week that it was leaving the Net Zero Asset Managers initiative, a nascent attempt by the industry to self-regulate its carbon emissions. Its departure reinforces the need for government oversight of climate risks in investments.
Absent legal, financial or professional repercussions, industry self-regulation is often little more than window dressing so members can say they’re doing something, anything.
That’s not to denigrate the work being done by the Net Zero Asset Managers initiative, which was formed two years ago and seeks to bring assets under management to net-zero carbon by 2050, preferably earlier. But Vanguard’s flip-flop — it joined a little over a year ago — shows that voluntary associations with non-binding commitments that lack financial or legal repercussions are not the tool we need to hit net-zero by 2050 or before.
Why did Vanguard leave? Fund leadership apparently chickened out because a few states’ attorneys general asked the Federal Energy Regulatory Commission to revoke Vanguard’s ability to buy shares in U.S. utilities, citing membership in NZAM as a reason why. (You can guess which party the attorneys general belong to.)
Vanguard wouldn’t cop to that, of course, instead posting a fantastically anodyne message that’s kind of informative if you squint hard enough. A few lines stand out:
Vanguard has been taking steps to understand and attend to this risk [climate change] to investors’ returns.
That’s fine, I guess, but totally unsubstantiated. Membership in NZAM, while not perfect, was at least a concrete sign that Vanguard understood the problem and planned to do something about the risk that carbon emissions pose to its clients’ money.
So what’s Vanguard doing now? A lot of talking. Its statement on its “approach to climate change” doesn’t contain a single measurable benchmark, just meaningless and unmeasurable aspirations. Ultimate flexibility, zero responsibility.
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 — and to make clear that Vanguard speaks independently on matters of importance to our investors.
“Clarity to investors” is so devoid of meaning that you could read it any way you want. So I’ll take a stab at it:
“Vanguard is afraid that climate change deniers are going to pull their money, and we want to be all things to all investors, so we’re going to say nothing meaningful on what’s probably the most consequential and financially risky issue of our time.”
I’m not sure if Vanguard has been paying attention, but there’s no such thing as a neutral position in this day and age. You have to decide whether to act or not, and that decision will have consequences. Vanguard decided to join NZAM but then got spooked, so it decided to withdraw. Congrats — now nobody’s happy.
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.
This point is meaningless for the reasons I cited above. Without measurable, meaningful benchmarks, Vanguard effectively has no commitment to helping its investors “navigate the risks” around climate change.
Vanguard’s waffling — and Fidelity’s unwillingness to join — shows just how badly the financial world needs regulations that address climate change and reveal the risks lurking within the system. The U.S. Securities and Exchange Commission’s proposed climate disclosure rules are a step in the right direction, but they’re just one of many that are needed. Transparency is meaningless without action.
Vanguard founder Jack Bogle liked to say that he preferred to invest in the “whole haystack” rather than look for a few needles that would provide outsize returns. With $7 trillion under management, the company can’t just sit on the sidelines and pretend to be neutral. Vanguard has a responsibility to its clients to invest in the part of the haystack that isn’t setting the rest of it ablaze.
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