Vanguard Group, One of ‘Big Three’ Index Fund Managers, Quits ESG-Oriented ‘Net Zero’ Group

Vanguard Group, One of ‘Big Three’ Index Fund Managers, Quits ESG-Oriented ‘Net Zero’ Group

How It Started: In October, my colleague Mike LaChance noted Wall Street’s enthusiasm for ESG (environmental, social, and governance) investing was already starting to wane.

How It’s Going: One of the “Big Three” index fund managers is now quitting an ESG-oriented group.

Vanguard Group Inc. is walking out of the world’s largest climate-finance alliance, marking the coalition’s biggest defection to date as US Republicans step up their threats against firms deemed hostile toward the fossil-fuel industry.

Vanguard’s decision followed a “considerable period of review,” according to a company statement Wednesday. Withdrawing from the Net Zero Asset Managers initiative, which is a sub-unit of the Glasgow Financial Alliance for Net Zero, “will help provide the clarity our investors desire” about everything from the role of index funds, to financial risks in the context of climate change, the firm said.

…Vanguard indicated its decision rested in a desire to maintain the freedom not to restrict its investment options.

Initiatives such as the net-zero alliance “can advance constructive dialogue, but sometimes they can also result in confusion about the views of individual investment firms,” Vanguard said. “That has been the case in this instance, particularly regarding the applicability of net-zero approaches to the broadly diversified index funds favored by many Vanguard investors.”

The “Big Three” (BlackRock, Vanguard, and State Street) can cast nearly 25% of the votes in any director election at S&P 500 companies. The departure has significant implications for the American economy.

Detaching investment from forced social and sustainability policies (not based on market needs or scientific fact) will help prevent the erosion of American independence in many areas….including energy, social decisions, and business choices that will allow for expansion and innovation. Millions of families, including mine, have Vanguard assets as part of their financial portfolios.

Studies show that companies with strong ESG ratings aren’t guaranteed to be good investment performers.

While having investment holdings in highly rated ESG firms may show concern for sustainability, a high ESG rating is not associated with a strong investment holding.

A joint study by professors from the London School of Economics and the Columbia Business school found no evidence of ESG investment funds outperforming non-ESG investment funds, showing that ESG ratings are unreliable regarding increasing investment returns. They also found that ESG funds have violated more labor and environmental laws than non-ESG firms. ESG-based investing does not provide any additional benefits compared to non-ESG based investing, on both the basis of the ESG-graded value or the monetary value of an investment.

ESG forces companies to make fuel and operational choices that might not be the best match for their operations. The documentation requires staff to describe in tedious detail how it is complying with a myriad of regulatory requirements and crunching a massive amount of data to prove it is doing (despite passing compliance inspections and audits from the interested agencies). ESG also forces companies to demonstrate that the company is checking off every progressive social-wish-list item, the choice of which should be at the company’s discretion based on its profits, the actual expenses, and the employees’ needs and priorities.

There are also anti-trust concerns the Republicans are already beginning to focus on.

Closely held Vanguard did not make executives available for comment. But its statement addresses a criticism from some investors and U.S. Republican officials that efforts like NZAM go against antitrust rules. That concern that had already led NZAM’s U.N.-affiliated parent to soften a policy on fossil fuel financing.

The anti-trust concerns are not trivial. Will Hild, executive director of Consumers’ Research, notes that Federal Energy Regulatory Commission (FERC) rules prohibit investors from meddling in utility company decisions.

…Under FERC rules, asset managers aren’t permitted to meddle in a utility’s operations. Vanguard is aware of this; that’s why the company promised FERC at its August 2019 authorization hearing it would be a passive investor in the utilities in which it holds shares. The commission granted authorization, and Vanguard’s investment has been anything but passive, actively pushing corporate managements to pursue net-zero targets and shutter coal and natural-gas electricity generation.

…FERC should investigate Vanguard’s activities to determine exactly what the asset manager has been telling utilities. The commission might also audit BlackRock’s compliance with the similar authorization it received in April. If these issues go ignored, consumers will continue to pay, both in higher energy prices and increased dependence on our adversaries. That’s a risk the U.S. can’t afford to take.

Less than one week after I called for the Federal Energy Regulatory Commission (FERC) to revoke Vanguard's authorization to purchase share in publicly traded utility companies, they folded.

Keep up the pressure, we're winning.

https://t.co/MWNjo9Em4b

— Will Hild (@WillHild) December 7, 2022

As an environmental health and safety professional, I assert that ESG does nothing meaningful to control pollution, improve the environment, or contribute to employee satisfaction at work. If anything, it’s a distraction from real work that needs to be completed.

Hopefully, other stock exchanges, investment groups, and corporations will swiftly come to the same conclusion.

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