Vanguard's efforts to navigate politics of ESG could be blueprint for others

So far, The Vanguard Group’s decision last month to pull out of the high-profile Net Zero Asset Managers initiative has sparked minimal reaction across the typically aggressive climate activism front, which is probably what the behemoth asset manager was hoping for. But the move hasn’t gone completely unnoticed and it's raising questions about whether Vanguard is merely the first domino to fall in a trend away from ESG investing pressures.

“I was pleasantly surprised to see this move, and I’m optimistic we’ll see more asset managers move away from associations with green organizations that are thinly veiled political advocacy groups,” said Charles Thomas III, founder of Intrepid Eagle Finance.

While some analysts and market watchers are shrugging off Vanguard’s pulling out of a commitment it agreed to in 2021 to making carbon reduction an investment strategy priority as inside baseball, others see a broader impact.

“I applaud Vanguard’s bravery and integrity for pulling out of the Net Zero Asset Managers initiative,” said Robert Netzly, president of Inspire Investing, a firm focused on faith-based ESG strategies.

“Net Zero is not about fiduciary responsibility, it is about pushing woke environmental extremism under the guise of ESG risk management,” Netzly said. “Vanguard is not exposing their investors to any more risk today than when they were in the Net Zero accord, and I hope Vanguard’s move will put steel in the spine of other major asset managers to follow suit and bail on the ill-conceived climate accord and focus on serving their investors well instead of pandering to the woke ESG mob.”

Vanguard declined to comment for this story but did forward a Dec. 7 statement regarding the controversial decision.

In the statement, Vanguard navigates the political and climate activism minefield by underscoring its commitment to more than 30 million individual investors and “a singular goal to maximize their long-term returns and give them the best chance for investment success as they save for retirement, a child’s education, a home, or simply a more secure financial future.”

Regarding the company’s decisions on the Net Zero initiative, the statement acknowledges the importance of climate change and its “far reaching economic consequences,” and explains that “Vanguard has been taking steps to understand and attend to this risk to investors’ returns, including through our engagements with portfolio companies, policymakers, and broader industry efforts.”

The statement admits initiatives like Net Zero “can advance constructive dialogue, but sometimes they can also result in confusion about the views of individual investment firms. 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.”

Thomas described Vanguard’s decision as a “move in the right direction and I encourage the firm to evaluate additional partnerships and memberships that run counter to the interests of Vanguard investors and the United States of America.”

Not everyone is as quick to celebrate Vanguard for going against the ESG grain.

“This is Vanguard doing the dance of how they can make their ESG backlash problem go away while doing as little as possible to change the status quo,” said Vivek Ramaswamy, founder of Strive Asset Management, an upstart asset manager that hopes to compete with the world’s largest asset managers by not succumbing to political pressures.

Ramaswamy claims Vanguard is trying to have it both ways and said that if the asset manager was truly committed to separating itself from ESG influence, it would also cut its ties with such notable organizations as the Principles for Responsible Investing, the Sustainability Accounting Standards Board and the Task Force on Climate Related Financial Disclosures.

“By pulling out of Net Zero, to the people backlashing they can say, ‘We’re different than everybody else,’ but even their statement was mealy-mouthed by saying it created confusion,” Ramaswamy said.

“It’s a classic game of doing for show whatever allows them to speak out of all sides of their mouth,” he added. “If all these fund management complexes dropped out of all these associations, that would be a big deal. I was proud of Vanguard when I saw that happen, but this move was a token move on their part.”

Daniel Yerger, president of My Wealth Planners, also views Vanguard’s decision on Net Zero as unavoidably political in nature.

“Vanguard's withdrawal from the climate alliance signals an ability for its management to think for itself,” he said. “The goal of net zero is admirable, but coalitions built on political premises rob managers of discretion and sometimes even the ability to exercise good judgment.”

In a similar vein, Thomas Balcom, founder of 1650 Wealth Management, interpreted Vanguard’s move as an attempt to step outside the politics of ESG investing.

“Vanguard is realizing in this current environment, it's best to refrain from leaning any direction politically,” he said. “This super-charged environment we are currently in is going to be a difficult one if firms begin to wade into political narratives. Vanguard recognizes this fact and is taking steps to remove themselves from potential business risk. I think other asset managers may follow suit since you risk alienating a portion of your client base.”

Meanwhile, the folks who analyze the asset management industry for a living still generally view Vanguard’s decision on Net Zero as inconsequential, at least until other big firms follow suit.

“I don’t think the vast majority of Vanguard investors care about this,” said Eric Balchunas, an ETF analyst at Bloomberg Intelligence whose 2022 book, "The Bogle Effect," details the history of Vanguard’s success.

Citing BlackRock's high-profile stances on climate change, Balchunas acknowledges there might be some effort by Vanguard to present a neutral stance on what he describes as a “political football.”

“You’ve seen BlackRock and its complications with picking sides,” he said. “It's very possible Vanguard has seen the grief BlackRock had to deal with and it’s possible they don’t want any part of that.”

Todd Rosenbluth, head of research at VettaFi, also thinks Vanguard is taking the temperature of the current environment around ESG and striving for as much neutrality as possible.

“Vanguard has been a lower-profile supporter of providing investors and advisors with ESG strategies than BlackRock or State Street Global Advisors, and less vocal about combating climate change than peers,” Rosenbluth said. “Their focus is on offering broad market exposure and they have a very loyal base of ETF and mutual fund shareholders.”