Vanguard's step back from climate issues sparks ire from some clients

Vanguard’s recent move to distance itself from climate-conscious investing won support from anti-ESG state leaders — but the firm is now getting pushback from some of its clients.

Earlier this week Vanguard received at least 1,400 copies of a form letter from the Sierra Club, signed by Vanguard investors. The letter asserts that by leaving the Net Zero Asset Managers initiative and not supporting shareholder resolutions on climate change, the firm is violating its fiduciary duties to clients. The response highlights that major asset managers will have difficulty avoiding flak from ESG supporters, detractors or both, as not taking a strong stance on climate change is seen as a stance in itself.

“I expect Vanguard, as my fiduciary, to exercise its duties of loyalty and care in its decisions,” the letter reads. “Unfortunately, Vanguard is currently insufficiently managing the risk to my investment from climate change, which potentially violates both of these fiduciary duties.”

In December, Vanguard announced that was withdrawing its membership in NZAM. That decision was made to help clarity the company’s role as an index fund provider, it said at the time. Industry initiatives such as NZAM “can advance constructive dialogue, but sometimes they can also result in confusion about the views of individual investment firms,” Vanguard stated.

The withdrawal coincided with pressure from Republican groups opposed to the use of ESG considerations in investing. Lawmakers in Texas were quick to support Vanguard’s exit from NZAM, granting the company a reprieve from questioning in a hearing over ESG concerns that included testimony from representatives of BlackRock and State Street.

Vanguard had noted that it does consider climate change to be a material financial risk, and it said as much in a written response about the Sierra Club letter.

“As an investor-owned asset manager, Vanguard is singularly focused on maximizing our clients' returns and giving them the best chance for investment success,” the firm said in a statement. “As we’ve long maintained, we consider climate change to be a material risk to companies and their shareholders, and are committed to continuing to help our investors navigate its impact on their long-term financial success.”

The investors signing the letter demanded that the firm make a comprehensive plan to address climate risk. That would include proxy voting guidelines that would push portfolio companies to reduce their greenhouse gas emissions in line with a 1.5 degree C global warming limit and “adopt and apply rigorous climate risk criteria and analysis across its entire portfolio.”

The author of the Sierra Club letter, Paul Rissman, was an executive vice president at AllianceBernstein until his retirement in 2008 and is currently a director of the Sierra Club Foundation.

“Vanguard is the largest holder of stocks in the world,” Rissman said. “If anyone can change corporate behavior, it’s Vanguard — and they refuse to do it. They say over and over again, ‘We’re not in the business of changing corporate behavior’ … But that’s part of their fiduciary duty.”

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

“They think that if companies recognize the risk of climate change, companies will automatically do something about it,” he said. “That has never been established. And … they are not concentrating on systemic risks. Climate change will affect the entire economy … It will affect basically every investment.”

Meanwhile, the firm that has faced the most scrutiny from the anti-ESG camp, BlackRock, has also been criticized for its role in climate change. Last September, for example, New York City Comptroller Brad Lander cited a chasm between the company’s stated position on climate issues and its portfolio holdings. Lander asked BlackRock to clarify its net-zero goals relating to all its investments.

The letter campaign Vanguard faces is potentially a first step in larger actions that some of its clients will take, Rissman said.

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