Investment behemoth Vanguard has been accused of falling behind its peers on climate due to its major fossil fuel exposure and the absence of clear policies to address climate risks.
The $7.2tn Vanguard Group, along with BlackRock and State Street, is one of the three largest asset managers in the world. But new analysis from the Institute for Energy Economics and Financial Analysis (IEEFA), a prominent US energy think tank, concludes that it is also the world’s largest investor in fossil fuels.
The study, released today, claims that the firm holds an estimated $300bn fossil fuel exposure – around 6% of its total assets – including $90bn in thermal coal.
In comparison, S&P data from January valued BlackRock’s exposure to oil and gas at $90bn. A 2019 Guardian-commissioned study estimated that State Street had invested at least $38.3bn in publicly-listed fossil fuel companies.
IEEFA researchers noted that Vanguard continues to operate without a basic exit strategy for coal and has a history of overwhelmingly voting with management against climate-focused resolutions. In addition, the report says the fund company is vague about its engagement activities, “has grossly underinvested in investment stewardship and its overall record of governance has been poor”.
Both BlackRock and State Street have been vocal about their increased engagement with fossil fuel producers in recent years, with the former pledging to vote against directors on climate grounds and the latter reporting more than 365 engagements on climate change since 2014.
In 2020, BlackRock committed to divest the bulk of its coal exposure, but has since faced criticism over a number of loopholes to that policy.
The IEEFA research also attributed a 5.6% performance drag on Vanguard’s $1.2tn Total Market Fund – currently the world’s largest fund – to underperforming fossil fuel stocks.
“When compared to its peers – BlackRock and State Street – Vanguard is a global laggard, leaving its investors to suffer ongoing wealth destruction, and an embarrassment on the global stage,” said Tim Buckley, an IEEFA Director and one of the report’s authors.
“Vanguard could change practice immediately and become a global leader but instead its passive approach to governance, engagement and climate is coming at a rising cost to its own investors in Vanguard products. It’s behaving like a regional player in the big league which due to its enormous size, brings systemic financial risks to the global economy.”
In response to the report, a statement provided to RI by Vanguard said: “As a steward of lifetime savings for more than 30 million people around the world, and a long-term investor in many companies, we represent our investors who have chosen to predominantly invest in broad-based index funds. In accordance with this mandate, our index funds do not divest from specific securities in their benchmarks, including those in fossil fuel intensive industries.
"Through our investment stewardship programme and as outlined in our frequently disclosed Investment Stewardship Insights and Perspectives on both thematic and vote-related topics, Vanguard regularly engages with the boards of carbon-intensive companies on climate risk. Vanguard has published clear expectations of boards to effectively oversee material climate-related risks, and to disclose the company's climate strategy, progress in risk mitigation targets, and their results using widely recognised investor-oriented reporting frameworks."
Vanguard is a signatory of the Net Zero Asset Managers Initiative, which requires the manager to make its entire portfolio Net Zero by 2050 and set interim targets for decarbonisation.
Separately, research by the Massachusetts Institute of Technology’s Sloan Impact Investing Initiative has revealed that Vanguard’s $9bn Social Index Fund – the oldest and largest ESG index fund in the US – has voted against almost all environmental or socially-focused resolutions over the past 14 years.
Faculty Director Gita Rao, who authored the research, said: “I would give Vanguard a D. Their social index fund is one of the largest ESG funds in the market, particularly in the retirement space.
“If a fund’s prospectus states that it is paying attention to environmental, social, and governance issues, then the fund’s voting should reflect that objective.”