Vanguard's break with ESG investing clouds practice's future viability

Vanguard CEO Tim Buckley made waves last December after withdrawing the firm from the Net Zero Asset Managers initiative, citing in part the company's financial duties to its investors.

The NZAM initiative is a coalition of financial firms committed to environmental, social, and governance (ESG) investing with a mind toward steering capital toward firms working toward the goal of net-zero greenhouse gas emissions by 2050, as outlined in the Paris Climate Accord. The bloc collectively has trillions in assets under management, and the departure of one of the world's largest asset managers has considerable implications for the soundness of the investing strategy.

Buckley emphasized that his firm maintained a fiduciary responsibility to its investors to deliver returns and that Vanguard's own analysis of ESG approaches showed that such a strategy could not reliably help it deliver for its investors.

"Our research indicates that ESG investing does not have any advantage over broad-based investing," he told the Financial Times earlier this month.

Buckley further acknowledged that Vanguard invests in thousands of companies and that it was not in a position to dictate business strategies to those firms, climate-related or otherwise.

"It would be hubris to presume that we know the right strategy for the thousands of companies that Vanguard invests with," he said. "We just want to make sure that risks are being appropriately disclosed and that every company is playing by the rules."

Observing that in 2022 tech stocks fell more than 30% while the energy sector saw gains of roughly 60%, the Wall Street Journal noted that ESG funds typically invest more in tech companies due to their green investing principles while ignoring the better performing traditional energy firms.

When a firm commits to an ESG pledge comparable to that of NZAM, the asset manager significantly limits the firms in which it might invest, potentially tying it to a sinking ship should certain pro-ESG sectors nosedive. Diversifying an investment portfolio, by contrast, helps to mitigate the risks to both firms and investors and potentially enable them to outperform markets overall.

It turbulent economic times, a restrictive ESG pledge may force an asset manager to choose between voguish causes and financial stability. With Vanguard seemingly opting for the latter, it falls to other firms to either follow suit or stay the course.

BlackRock, the world's number one asset manager with more than $10 billion under management and a leading proponent of ESG investing, has come under sustained fire from Republicans over so-called "woke" capitalism in connection with its ESG practices. 

Deep-red Republican states such as Oklahoma and West Virginia have enacted measures barring the investment of state funds with firms that either boycott the energy sector or practice some measure of ESG investing. More recently, Florida Republican Gov. Ron DeSantis announced that fund managers handling its state assets may not factor in ESG concerns when making investments.

"We need asset managers to be laser focused on returns and nothing more," he said at the time.

Republican efforts both in state legislatures and in Washington appear to have been something of a wake-up call for BlackRock in particular. CEO Larry Fink has reportedly redoubled efforts to win over conservative lawmakers and begun planning more donations to Republicans in the next election cycle, the New York Post reported last week.

BlackRock's website states: "As a fiduciary, we have an obligation to act in the best interest of our clients and to be solely focused on their investment objectives. Our clients' interests come first. Always."

GOP lawmakers have previously floated investigating whether the company's ESG practices conflict with its fiduciary responsibilities to investors. Under such scrutiny, the asset manager could struggle to account for its policies should lawmakers allege they opted for less profitable investments.

In the event that more firms follow Vanguard's lead, ESG-driven investment coalitions could face a turbulent future.

Ben Whedon is an editor and reporter for Just the News. Follow him on Twitter.