Vanguard CEO defends decision to pull asset manager out of climate group

The chief executive of Vanguard has defended his decision to pull the world’s second largest asset manager out of an industry-wide alliance to tackle climate change, saying the group’s “voice was being drowned out”.

In December, Vanguard resigned from the Net Zero Asset Managers initiative, a coalition of 301 asset managers committed to reducing greenhouse gas emissions.

“We felt that our voice was being drowned out or confused,” said Tim Buckley in an interview with the Financial Times.

Buckley added that Vanguard’s approach to managing climate change risks, which is focused primarily on company disclosure standards, “has not changed”.

“We don’t believe that we should dictate company strategy,” he said, in his first public comments about the decision. “It would be hubris to presume that we know the right strategy for the thousands of companies that Vanguard invests with. We just want to make sure that risks are being appropriately disclosed and that every company is playing by the rules.”

Vanguard has found itself caught between the two sides of the climate change debate.

The decision to withdraw from the coalition has sparked fury among environmental activists already angered by the Pennsylvania-based asset manager’s refusal to rule out new investments in fossil fuels.

Campaigners say it should use its influence to press companies to accelerate the decarbonisation of their operations. While US Republican politicians accuse it of failing to support fossil fuel industries.

Buckley, however, said that Vanguard was “not in the game of politics”. 

“Politicians and regulators have a central role to play in setting the ground rules to achieve a just transition to a lower carbon economy,” he said, when asked about the increasing politicisation of ESG investing.

The Vanguard boss also warned investors not to expect superior returns from ploughing money into ESG funds and alternative assets — two of the fastest growing parts of the asset management industry — rather than the index-trackers championed by his firm.

“We cannot state that [environmental, social and governance] investing is better performance wise than broad index-based investing,” said Buckley. “Our research indicates that ESG investing does not have any advantage over broad based investing.”

Vanguard has more than 30mn clients worldwide and has built a business with $7.2tn in assets under management by championing low-cost tracker funds that follow an index such as the S&P 500 or FTSE 100.

Owned by the investors in its funds, Vanguard does not pay dividends to external shareholders. This structure has helped it become the investment industry’s most aggressive price competitor with continual reductions in its fund fees since it was founded in 1975.

Assets managed by ESG funds have soared to $2.5tn from just $0.6tn at the start of 2018. But Russia’s invasion of Ukraine has led to significant gains for energy and defence stocks, heralding soul-searching for ESG focused investors in a tough environment for returns.

Vanguard sells just 28 sustainable funds with global assets of $33.9bn. That is well behind its closest rival BlackRock, which has a far bigger range of 282 sustainable funds with assets of $270bn, according to data provider Morningstar.

The firm offers ESG index funds that exclude certain companies, which “allow investors to express their values and preferences” but this “has to be an individual investor’s choice,” said Buckley.

Buckley, who started his career at Vanguard in 1991 as a research assistant to its founder Jack Bogle, is also sceptical about the prospects for so-called alternative strategies, such as private equity and private credit. He warned that alternative strategies are “not a panacea to the challenges facing investors”. 

“Overall portfolio returns are not automatically improved by allocations to private equity or private credit as good manager selection is essential,” he said. “Alternatives might provide a great revenue stream for a fund manager but they might not be a great solution for an investor.” 

Buckley now wants to drive more price competition into the financial advice industry to lure more clients into Vanguard’s own advisory business, which is growing by 15 to 20 per cent a year. He has set a target of bringing advice to 1mn clients by the end of 2025. The group currently provides advice to about 650,000 retail clients that together account for $350bn in assets.