Shortly before COP26, last year’s United Nations climate conference in Glasgow, financial institutions were rushing to announce their climate commitments. The conference’s leadership and Mark Carney, a special envoy appointed by the United Nations to push private finance to invest in climate solutions, announced the creation of the Glasgow Financial Alliance for Net-Zero, or GFANZ.
The initiative’s goal was to increase the number of financial institutions committed to net-zero principles — essentially a promise that the work done by these institutions (investing, lending money, managing major assets like pension funds) would not cause an overall increase in the world’s carbon emissions. During the conference, Carney announced that the coalition had grown to 450 firms responsible for $130 trillion in assets, a pot of wealth equivalent to more than five times the gross domestic product of the United States.
“You need things like GFANZ that are relentlessly, ruthlessly, absolutely focused on that transition to net-zero,” he told Bloomberg at the time.
But just a year later, many Wall Street firms are backtracking. In September, the Financial Times reported that several banks, including Bank of America and JP Morgan, were concerned about accidentally running afoul of United Nations climate rules and being held legally liable for their commitments, leading them to consider pulling out of GFANZ. Blackrock and Vanguard, the world’s largest asset managers, then confirmed in October that their net zero commitments would not preclude them from investing in fossil fuels, despite concerns that new fossil fuel investment is incompatible with timely decarbonization. (Asset managers steward money on behalf of major investors like sovereign wealth funds, insurers, and pension funds.) And finally, earlier this week, Vanguard officially announced that it is resigning from the Net Zero Asset Managers initiative, a sector-specific alliance under the GFANZ umbrella.
Initiatives like the Net Zero Asset Managers initiative “can advance constructive dialogue, but sometimes they can also result in confusion about the views of individual investment firms,” the company said in a statement, which appears to reference the backlash that Vanguard and other firms have received from Republican attorneys general for considering environmental concerns in some of the investments they offer.
In the last few years, as the global costs of climate change have become more apparent, pressure on companies to reduce carbon emissions and prioritize environmental initiatives has increased dramatically. Asset managers like Blackrock and Vanguard largely joined this call and were supportive of many shareholder-led climate proposals that resulted in the appointment of new directors at ExxonMobil, the adoption of emission reductions at companies like Chevron, and the reporting of risks from the energy transition to a company’s bottomline.
But as climate-focused investment practices (such as screening out fossil fuel companies in certain boutique index funds) gained traction and companies joined GFANZ, questions mounted about whether Wall Street’s apparent climate-consciousness was actually moving the needle on net zero, if climate commitments would run afoul of firms’ fiduciary duties (by steering investors away from profitable-but-polluting investments), and if they would be able to abide by the United Nations’ climate targets.
The discussion is complicated by the fact that many fossil fuel investments managed by Vanguard and other asset management firms are held in index funds that track the performance of the overall stock market — the kind that many American workers use to save for retirement, for example. These index funds invest in a broad range of companies regardless of those companies’ carbon emissions, and GFANZ didn’t change that — in part because changing the makeup of a fund would require the approval of investors and could result in legal challenges. As a result, Vanguard’s commitments apply primarily to a subset of funds that it actively manages to adhere to vaguely-defined environmental, social, and governance principles, or ESG. It offers these funds to investors who also support those principles and want to put their money behind them.
Vanguard appeared to underscore this distinction, however vaguely, in its decision to withdraw from GFANZ, stating that it wanted to “provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks — and to make clear that Vanguard speaks independently on matters of importance to our investors.” More than 80 percent of its clients’ assets are in index funds, it noted.
Wall Street has also been facing pressure from Republican lawmakers and attorneys general, who have accused firms of “woke capitalism.” They’ve made sustainable investment practices a flash point, opening investigations into banks that have committed to net-zero and reportedly planning to hold hearings on the issue in the new Republican-majority House of Representatives that assumes office in January. Earlier this week, the Republican staff of the Senate Banking Committee released a report pillorying BlackRock, Vanguard, and another asset manager for using “shareholder voting power to advance a liberal political agenda.”
Last month, Republican attorneys general also filed a protest with the Federal Energy Regulatory Commission against Vanguard buying shares of U.S. utilities, arguing that the firm’s commitment to net-zero meant that it might push the utilities to move away from coal and natural gas, even if fossil fuel buildup would be better for investors than renewables. “This will undoubtedly affect the cost and reliability of energy supplies,” they said.
Kirsten Snow Spalding, a vice president at the sustainability nonprofit Ceres, said in a statement that it is “unfortunate that political pressure is impacting this crucial economic imperative and attempting to block companies from effectively managing risks — a crucial part of their fiduciary duty.”
While financial institutions face political pressure to ditch climate-focused initiatives, they are also increasingly battling regulatory pressure to take the risks of climate change into account. The Securities and Exchange Commission, the watchdog federal agency meant to protect U.S. investors, has issued new climate risk disclosure rules for asset managers and is cracking down on firms that are inflating their climate bona fides. The Commission has a separate task force that identifies misconduct related to climate and ESG investments within its Division of Enforcement. Last month, the Commission targeted Goldman Sachs for failing to adequately evaluate ESG factors before including securities in ESG-branded funds. The firm paid $4 million in penalties to settle the case.
