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Investing giant Vanguard isn’t doing investors any favors by scaling back its attention to climate change while opting where and how to invest client money, retirement investors told the company in a letter sent Monday.
More than 1,400 parties that invest with Vanguard for pensions, retirement-savings plans and more joined in the complaint, which they sent to the general counsel of Vanguard
VTI,
the world’s second-largest fund firm and asset manager behind BlackRock
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with about $7.2 trillion under its watch.
Ignoring climate-change risks is a “breach of fiduciary duties,” the letter charges. Such a breach might include remaining invested in potentially stranded energy assets as more of the economy leaves fossil fuels
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for alternatives like wind, solar
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and nuclear, or investing in companies that drag their feet in reporting their greenhouse-gas emissions, deemed responsible for manmade global warming.
Vanguard has said it still considers climate change a material concern, but will track those concerns independently of industry initiatives.
For its critics, that’s not enough.
“Fiduciary responsibilities” has been a key phrase of late as sustainably minded investment groups, regulators and, increasingly, politicians weigh in on the role of investment firms when it comes to considering environmental, social and governance (ESG) factors while stock picking. Climate change and the energy transition have earned their own focused attention under the wider ESG umbrella, which also tracks board diversity, or, for instance, whether CEO compensation is linked to an emissions scorecard.
At the same time, there’s been a swell of interest in so-called anti-woke sentiment against Wall Street and ESG, which claims investments focused on the impending clean-energy transition and other pro-climate actions only come at the expense of returns.
Congress last week voted largely along party lines, with a couple of key Democratic dissenters siding with Republicans in the narrowly held Senate, to roll back a Labor Department ESG rule covering individual retirement accounts (IRAs) and 401(k)s. The Labor Department rule, passed late last year, allowed asset managers to mull ESG factors when investing as long as they kept fiduciary and economic considerations a priority.
That rule, by most accounts, returned to “neutral” a position the Trump administration had taken, which would punish investment managers for factoring in ESG. President Joe Biden has already said he will veto the rule rollback, restoring its status set last year.
“The [Labor Department] rule reflects what successful marketplace investors already know — there is an extensive body of evidence that environmental, social and governance factors can have material impacts on certain markets, industries and companies,” said a statement from the White House.
Washington’s latest action on the issue amplifies a debate that has already spilled over from Wall Street into the courts, state legislatures and governors’ offices, as well as the 2024 presidential race, as detractors of ESG ramp up their efforts to equate it with “woke” liberal politics.
“‘Before my Mom passed, she asked me to be trustee of accounts that she set up for her grandkids. That means I’m a fiduciary, just like Vanguard is a fiduciary to me. Climate change will ruin this legacy. Only Vanguard can help me preserve it, and they refuse to act.’ ”
This week’s letter to Vanguard specifically asserts that the asset firm is violating its duty of care to investors. The letter criticizes Vanguard for falling behind its industry peers on mitigating climate risk, as well as for “lack of attention to prudent proxy voting,” during which shareholders attempt to gather critical mass to make changes at a company. Secondly, the letter asserts that Vanguard is violating its duty of loyalty.
“In recent months, Vanguard has opaquely placed the firm’s own financial interests ahead of those of its investors,” the letter says, citing Vanguard’s withdrawal from the high-profile Net Zero Asset Managers Initiative, as well as raising the potential for litigation similar to a recently settled lawsuit from a pension investor in Australia.
When Vanguard pulled out of the Net Zero Asset Managers Initiative, it said in a statement at the time that it would track its climate-minded progress independent of the alliance in an effort to provide “clarity” to its investors. But some sustainable-investing groups critical of the departure accused Vanguard of kowtowing to “anti-woke” sentiment.
The NZAM alliance was launched in late 2020 to encourage asset managers to hit a net-zero emission target by 2050 and help keep a rise in global temperature to 1.5 degrees C. That’s a voluntary temperature goal agreed to at the pivotal 2015 Paris climate meetings and is seen by its backers as the marker key to slowing atmospheric warming, calming acidifying oceans, preventing coastal erosion, and limiting severe droughts and other deadly and expensive environmental changes.
The letter asks Vanguard for “best-in-class” standards, consistent with Paris Agreement temperature goals, for assessing portfolio companies. And it urges more investment offerings that are “1.5°C-aligned” and on a “zero-emissions pathway.”
Related: U.S. corporate greed has gone too far, says Norway fund manager who voted against Apple CEO’s pay
Investor Paul Rissman, a current customer and trustee of Vanguard accounts that his mother passed down to his children, first drafted the letter. Prior to his retirement in 2008, he was executive vice president of AllianceBernstein L.P. and chief investment officer of Alliance Growth Equities. He is currently a director of the Sierra Club Foundation, an environmental organization.
“Before my Mom passed, she asked me to be trustee of accounts that she set up for her grandkids,” Rissman said in a release. “That means I’m a fiduciary, just like Vanguard is a fiduciary to me. Climate change will ruin this legacy. Only Vanguard can help me preserve it, and they refuse to act.”
The full text of the letter is available here.
Asked to comment Monday on the letter, a Vanguard spokesperson said, “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 company repeated its assertion that it considers climate change to be a material risk to companies and their shareholders, and it will help clients navigate the impact of a warming Earth on their long-term financial success.
University of Oregon law professor Susan Gary has conducted research linking protection from climate change to the long-held fiduciary responsibilities of investment firms, which must consider returns over an extended time horizon.
“Vanguard has said climate change is a material risk to their clients’ investments, so it would follow that Vanguard should do what it can to mitigate that material risk,” Gary said.
“If Vanguard fails to address material risk, it may be violating its duty of care to its customers. If Vanguard is putting its own interests above its customers’ interests, it could be violating the duty of loyalty. And if Vanguard is preferencing one set of customers over another, it could be violating its duty of impartiality,” she added. “Vanguard should be concerned that if it is in breach of these fiduciary responsibilities, its customers could have grounds for a class-action suit.”
But fund firms are hearing it from all sides.
Florida Gov. Ron DeSantis, a likely 2024 Republican presidential candidate, took action to prohibit state-run fund managers from taking ESG factors into consideration when making investments. And last year, Florida said it moved $2 billion in taxpayer assets from accounts with BlackRock because of ESG.
Florida would “never surrender to the ‘woke’ mob,” DeSantis said at a press conference for the announcement.
Related: BlackRock’s Fink says climate and ESG-investing attacks getting ugly, personal
And: Climate investing is ‘a matter of value, not values,’ says State Street’s O’Hanley
