A report on Vanguard Group Inc. by the Institute for Energy Economics and Financial Analysis (IEEFA) highlights grave alleged faults and shortcomings in its policies on climate change, despite the asset management giant’s public statements and posturing on environmental, social and governance-focused investing.
The report accuses Vanguard, the second largest asset manager in the world after BlackRock, of “leaving its investors to face profound wealth destruction risks” from climate change, in contrast to its public commitment to the Net Zero Asset Managers initiative.
The IEEFA specifically highlights some 6% of Vanguard’s entire portfolio, or US$300 billion, of fossil fuel exposure, including some $90 billion in thermal coal, and further accuses Vanguard of “transparency failure” in neglecting to disclose this fact to its investors.
The report contrasts this with the actions of Vanguard’s competitors, citing BlackRock’s announcement in January 2020 that it would divest thermal coal from across its active debt and equity funds, and its subsequent moves to align with the Net Zero initiatives. Vanguard, meanwhile, has maintained some $256 billion of fossil fuel exposure in its passive funds, which comprise around 80% of its business or over $5.8 trillion of assets under management, the report alleges.
It notes that Vanguard holds roughly 10% of every company in the S&P 500 and potentially has “enormous power to shape management decisions which reduce climate impact”. Instead, according to the IEEFA, it votes consistently with investee management against climate change initiatives. Furthermore, the report states that Vanguard is fully able to shift its benchmarks for passive products to exclude fossil fuel exposure but neglects to do so.
Vanguard has not issued an official statement on the accusations. But it has responded in some news media. In the Australian Financial Review, the asset manager says that “our investment stewardship activities are the principal levers Vanguard can use to help oversee, engage upon, and safeguard fund investors from climate change risk”.
Some climate change sceptics might dismiss this controversy as so much sniping, except for the very interesting angle that the IEEFA has taken in its attack. Not only does the report accuse Vanguard of neglecting “basic fiduciary duty” in failing to report climate risk to its investor clients, it also specifically underlines the value destruction from investment in indices exposed to climate risk.
The IEEFA singles out Vanguard’s $1.2 trillion-plus Total Market Index Fund (VTI), the world’s largest fund. Compared to the MSCI US ex Fossil Fuels benchmark, it says that the VTI fund has underperformed by some 5.6% from January 2020 to June 2021.
If true, this is not only a condemnation of Vanguard’s climate blind spot but a fresh reminder of the potential risk of ignoring climate change in investment strategies. Given the immense stranded asset risk highlighted by other reports on climate change, the potential value destruction could be even more grave. Vanguard may be running far more than plain reputational risk if it is failing to engage on climate change.