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The problem with passive managers and climate pledges

Vanguard becomes the latest fund giant to commit to ‘net zero’
The problem with passive managers and climate pledges

If there’s one thing we’ve learned from the pandemic, it’s that the world was ill-prepared. It’s not surprising that governments and asset managers are now throwing renewed efforts at tackling another major global threat – climate change. 

Over the past decade, climate change has crept up the agenda of just about all investment houses. It’s barely possible to find an asset manager that doesn’t dedicate pages to its environmental, social and governance (ESG) policies, and as ESG has become more fashionable, so has scepticism about so-called greenwashing. 

One new programme that may help assuage critics is the Net Zero Asset Managers Initiative, a club of 73 asset managers committed to supporting net-zero greenhouse gas emissions by 2050 or sooner, in line with global efforts to limit global warming to 1.5C above pre-industrial levels. Concrete commitments make it easier to hold asset managers to account.  

The initiative, which was set up in December 2020, welcomed Vanguard to its ranks this week, joining a slew of other big investors including BlackRock. It now boasts signatories with a total of $32tn (£23.26tn) in assets under management – over a third of global assets under management.

The commitment of big passive players to climate policies is crucial. According to Harvard academics, the ownership stakes of BlackRock, Vanguard and State Street have almost quadrupled in the past two decades, making them responsible for 25 per cent of the votes cast on S&P 500 companies. The researchers estimate this will grow to 40 per cent in two decades. The US is the world’s second-largest carbon-emitter, after China.  

So far, the big passive fund houses appear to have let themselves down on climate issues. A recent report by ShareAction on the responsible investment practices of the world’s 75 largest asset managers ranked BlackRock 47th and Vanguard 69th on their management of ESG risks. 

Campaign group Majority Action revealed that BlackRock and Vanguard voted overwhelmingly against climate-critical resolutions by S&P 500 companies in 2020, with BlackRock supporting just three of the 36 and Vanguard only four. At least 15 of these critical climate votes would have received majority support of voting shareholders if these two fund giants had voted in favour of them, the report says.  

Hopefully a fresh commitment to a new initiative will help them take their climate responsibilities more seriously. An obvious problem with passive managers pledging climate commitments is that even if companies fail to meet their demands, they have to own them anyway if they are in the index their funds track - and investee companies know this. 

However, it’s engagement that should be encouraged. Simply refusing to own companies that have high emissions and leaving them for others to own will not solve the climate problem. Perhaps Vanguard and BlackRock are in a stronger position than others as large, long-term shareholders that can actively use their influence to make companies reduce their carbon footprint.

As Colin Melvin, founder of consultancy Arkadiko partners, points out, though, this can be more challenging for smaller passive managers that do not have the engagement resources per investee company that active managers might typically have. Melvin thinks the net zero asset managers initiative is "excellent", but it is important signatories act on their commitment.   

While a cynic might cast this pledge by Vanguard, BlackRock and other fund houses as a public relations exercise, it is at least raising awareness and hopefully creating an impetus for companies to act. Whether they match words with deeds will be closely watched.