Strive’s Response to Vanguard Net Zero Exit

In December 2022, Vanguard announced its departure from the Net Zero Asset Managers (NZAM) initiative. While Vanguard’s exit is a good first step in the right direction, it can’t be the last. If Vanguard is serious about restoring its place as a fiduciary for its clients, it needs to prove that it is committed to focusing solely on its clients’ financial interests, without regard to environmental or social issues. There are reasons to be skeptical. This report explains why.

1.     Vanguard’s Motives: Vanguard Left NZAM To Dodge Public and Government Scrutiny

When evaluating the impact of Vanguard’s NZAM departure, it is important to look at how Vanguard’s sudden change of heart came about.  Vanguard claimed that it did so “to make clear that Vanguard speaks independently on matters of importance to our investors,” but the timeline suggests otherwise:

  • March 29, 2021: Vanguard joins NZAM.
  • May 25, 2022: Vanguard celebrates “meaningful progress” towards net zero goals.
  • July 12, 2022: Texas legislature asks Vanguard for documents and testimony regarding ESG practices, threatening to issue subpoenas if company does not comply.
  • Sept. 7, 2022: Strive Co-Founder Vivek Ramaswamy pens Wall Street Journal op ed calling Vanguard out for environmental activism at Chevron.
  • Nov. 28, 2022: Thirteen state attorneys general, including Texas Attorney General Ken Paxton, asked the Federal Energy Regulatory Commission to revoke Vanguard’s authorization to invest in electric utilities, because  Vanguard’s environmental activism and ESG demands hurts consumers by raising electricity prices. 
  • Dec. 6, 2022: GOP Senate Banking Committee accuses Vanguard of violating securities and banking laws for ESG practices including NZAM membership.
  • Dec. 7, 2022:  Vanguard announces it is pulling out of NZAM.
  • Dec. 14, 2022: Vanguard is excused from testifying before the Texas legislature.
  • Dec. 15, 2022: Texas legislature grills Vanguard’s competitors, BlackRock and State Street, for ESG practices, while Vanguard is spared.

As reflected in the timeline above, Vanguard left NZAM only after being pressured by regulators and lawmakers who were threatening legal action against the company. In this situation, praising Vanguard for leaving NZAM is like praising a schoolchild for swallowing his gum when the teacher is about to pass his desk, knowing he’s going to be caught.  Vanguard knows ESG is wrong, it knows it was facing consequences, and so it appears to have done the absolute minimum to get out of trouble. A deeper dive into Vanguard’s past and current policies is therefore needed to determine whether Vanguard’s decision to leave NZAM was a true turning point for the company, or whether it was a savvy PR move intended to provide cover for Vanguard to continue its ESG advocacy via other means.

2. Vanguard’s Actions: Vanguard Has Not Made Meaningful Change

a.    Vanguard Is Still A Member Of Other Climate Focused Organizations

As of March 2023, Vanguard is still a member of several other organizations that are committed to advancing contested climate policies and meeting the goals of the Paris Agreement, which the United States has never ratified. It is a signatory to:

b.    Vanguard’s Voting History Presents Substantial Concerns

Vanguard’s voting history also problematic.  In recent years, it has voted:

To our knowledge, Vanguard has not made any attempts to rescind these votes by, for example, introducing its own shareholder initiatives proposing to reverse these policies, communicating to management that its prior votes were ill considered and are not reflective of Vanguard’s position, or vowing to support new shareholder initiatives that would revoke these policies. 

c.    Vanguard’s 2023 Voting Guidelines Are Not Much Better

Its current voting guidelines appear to make progress on some fronts, including a pledge not to vote for climate-related policies that micromanage target companies, but other parts of its guidelines remain problematic.  For example, Vanguard intends to:

  • Vote out directors unless they “effectively identify, monitor and ensure management” of “social and environmental risks, inclusive of climate change.”
  • Hold boards accountable for developing “business strategies” that “anticipate[] regulatory requirements and changes in market activity in line with the Paris Agreement.”
  • Require companies to issue climate reports following frameworks developed by the Sustainability Accounting Standards Board and the Task Force on Climate-Related Financial Disclosures, even where the company’s board opposes such disclosures and believes they are not in the best long-term financial interests of shareholders. 
  • Vote against certain board members unless the board meets certain racial and gender quotas to meet Vanguard’s “diversity” requirements.

Vanguard has issued a separate report on its “approach to climate risk governance” that asks companies to direct enormous amounts of corporate resources towards addressing climate issues, including by: 

  • appointing board members based on climate experience and knowledge, 
  • setting and publicly announcing goals and targets to fight climate change, and 
  • making public disclosures on strategies and progress towards those goals.

d.    Vanguard Has Not Rectified Its Past Transgressions

Vanguard’s recent departure is essentially an admission that its membership in the Net Zero Asset Managers initiative constituted a breach of its fiduciary duties to its clients, yet it has offered nothing to compensate its past victims and little to ensure that these breaches will not continue.

There is little doubt that Vanguard’s participation in NZAM constituted a breach of its fiduciary duties. As a member of NZAM, Vanguard agreed to “accelerate the transition towards global net zero emissions” by “[i]mplement[ing] a stewardship and engagement strategy, with a clear escalation and voting policy, that is consistent with [NZAM’s] ambition for all assets under management to achieve net zero emissions by 2050 or sooner” (emphasis added). In its own marketing materials, Vanguard touted its work with NZAM, boasting of its engagements with companies “about the transition to net zero” and Vanguard’s “progress across both our actively managed and index-based products” as it pressured companies to set and meet emission reduction targets.

At a minimum, Vanguard’s commitment to the organization presents exactly the kind of mixed motive investing that the law forbids. As a fiduciary, unless Vanguard receives the express consent of its clients to do otherwise, it is legally obligated to focus solely on maximizing its clients’ long-term returns.  Its own statement in leaving NZAM—no doubt carefully vetted by its legal team—essentially admits as much: It announces its departure from the organization by explaining that Vanguard’s “singular goal [is] to maximize [its clients’] long-term returns and give them the best chance for investment success.” Membership in NZAM, plainly, is not consistent with that singular goal.

It’s true that Vanguard has tried to defend its membership in the organization, even as it parts ways.  Its departure memo, for example, now claims that Vanguard participated in the organization merely to “dialogue” with the real members and blames clients and policymakers who Vanguard claims were “confus[ed]” about its role. But if people were confused, it was only because both NZAM and Vanguard stated, repeatedly, that they sought to accelerate the transition to net zero, using the force of other people’s investment money to do it. If Vanguard never really meant that, then it should not have joined the organization in the first place.

There can be no forgiveness without repentance, and Vanguard’s carefully-crafted non-admissions do not suffice. If Vanguard is serious about restoring its commitment to acting as a fiduciary for its clients, and putting their financial needs first, there are several steps it would be taking to rectify its missteps and ensure they do not happen again:

  • Perhaps most intuitively, Vanguard would, in good faith, offer compensation to those clients whose investment money was used to promote social or environmental goals without their consent, including, at a minimum, returning any management fees Vanguard charged to such investors.
  • Vanguard would conduct an internal investigation to determine how a breach of fiduciary duty of this magnitude was able to occur, so that it can hold the individuals responsible for such decisions accountable and put mechanisms in place to safeguard clients from the risks of such mismanagement in the future.  
  • As discussed above, Vanguard would immediately withdraw from all social and environmental groups that demand Vanguard commit to goals that may or may not align with its clients’ financial interests and would take steps to reverse the environmental policies Vanguard pressured portfolio companies to adopt. 

It does not appear that Vanguard has taken any of these steps. As such, its departure from NZAM appears to be mere tokenism, rather than a true commitment to put its clients’ financial futures first.   

3. Vanguard’s Message: Vanguard’s Exit Should Nonetheless Sound the Alarm for Other NZAM Members

As described above, Vanguard has a lot more work to do before it can be trusted, in our view, to manage clients’ investment funds. That said, Vanguard’s decision to leave the Net Zero Asset Managers initiative was a step in the right direction, and one that should prompt other asset managers to examine their memberships as well.

Over the past year, Strive has sought to educate the public about ESG investing, and how the interests of the large asset managers who promote ESG investing rarely align with the interests of investors seeking to maximize long-term financial returns.  As outlined above and elsewhere, public officials have begun to take note, pressing Vanguard, BlackRock and State Street (the “Big Three”) for documents, testimony, and information about their ESG investing practices, pulling money from ESG-promoting asset managers, and proposing legislation to protect financially-minded investors.  But until Vanguard’s recent departure from NZAM, the Big Three have largely attempted to defend ESG investing by arguing that it is in the long-term financial interest of investors.  With Vanguard’s exit, that argument is no longer tenable.  

In a recent interview with the Financial Times, Vanguard CEO Tim Buckley explained:

We cannot state that environmental, social and governance investing is better performance wise than broad index-based investing. Our research indicates that ESG investing does not have any advantage over broad-based investing.  

(internal quotation marks and brackets omitted). Vanguard then shared figures demonstrating that both its US and International ESG funds have underperformed their non-ESG counterparts over the past 1 and 3 years:

As the chart above reflects, both Vanguard’s U.S. and international ESG funds gained less than their non-ESG counterparts over the past three years, and lost more than those non-ESG funds over the past twelve months.

This research, coupled with Vanguard’s departure from NZAM, should send a strong message to its ESG bedfellows: Asset managers who care about fiduciary duties must reevaluate their commitment to integrating ESG into their investment strategies, and do so quickly. BlackRock and State Street—the other two members of the Big Three—should be first in line. Both asset managers continue to be members in organizations like NZAM as well as Climate Action 100+, the Business Roundtable, United Nations Principles for Responsible Investing and others. Now that Vanguard has publicly acknowledged that participation in NZAM cannot be reconciled with its fiduciary duties, BlackRock and State Street’s continued participation in such groups is indefensible.  


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