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.
Casey Harrell, a senior strategist at The Sunrise Project, said that Vanguard customers "around the globe will be the ones who will suffer in the long term."
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."
NZAM 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."
Kirsten Snow Spalding, vice president of the Ceres Investor Network, a founding partner of NZAM, said "all asset managers are struggling with passive." But that shouldn't rule out committing to net zero, she said. Firms can work with the heaviest emitters represented in indexes to get them to decarbonize through engagement, she said. They can also ensure that client mandates are more closely aligned with net zero. But Ms. Spalding acknowledged that the industry needs more help from regulators.
Many of the world's biggest money managers have tended to exclude funds they define as passive from their emissions estimates. An analysis earlier this year of 30 major investment firms showed that none applied fossil-fuel restrictions to all their index-tracking funds, according to Reclaim Finance. Of those, 25 were GFANZ signatories, which at the time included Vanguard, as well as BlackRock and State Street.
Of the roughly $8 trillion that BlackRock oversees, some 27% was actively managed at the end of September. PwC expects the global market for assets under management to reach $145 trillion by 2025, with only 60% of that actively managed. "Passives will gain huge market share," it said.
Vanguard said 96% of the funds it manages don't align with net-zero goals, and it now has no plan or commitment to change that.
In April, the Science Based Targets initiative, a U.N.-backed group, said it would no longer provide emissions-reduction verifications for asset managers that excluded all their passively invested funds.
"Passive funds continue to be a topic that we discuss with financial institutions in their near-term science-based targets," said Nate Aden, finance sector lead at SBT. "There are bright spots, and we are elaborating on this topic in our financial-institutions net-zero criteria, the draft version of which we plan to publish early next year."
