The decision by Vanguard Group Inc. to withdraw from the high-profile Net Zero Asset Managers Initiative drew swift reactions this week from climate action advocates and red states alike.

Some observers of corporate environmental, social and governance strategies warned that Vanguard's withdrawal could trigger a domino effect among other U.S. financial firms. As of the afternoon of Dec. 9, however, no other company had indicated they would leave the coalition, a spokesperson from the Net Zero Asset Managers Initiative, or NZAM, said in an email.

Vanguard has been removed from the initiative's list of signatories, and the firm's page showed up as a broken link.

The world's second-largest asset manager, Vanguard set off a firestorm when it announced Dec. 7 that it would leave the United Nations-led climate initiative, which it joined in March 2021.

The coalition was formed to encourage clients of investment firms to achieve net-zero greenhouse gas emissions by 2050, a goal set to limit global warming to 1.5 degrees C. As of November 2022, the initiative had 291 signatories with $66 trillion in assets under management, considerable clout that did not sit well with activist Republican state officials in the U.S.

Republican states praise, blue states blast decision

During 2022, state attorneys general and treasurers in West Virginia, Texas, Louisiana, Florida and other states banned banks and investment firms from pension funds and other public holdings as part of a well-coordinated backlash against ESG policies. The states have argued that Wall Street is going beyond its fiduciary duty to manage money to push a political agenda that runs contrary to state interests, such as divesting from coal and other fossil fuel investments.

West Virginia Treasurer Riley Moore, a Republican and outspoken opponent of ESG strategies, called Vanguard's exit "tremendous news."

The decision "demonstrates we are turning the tide against the woke radicals who are trying to impose their social and environmental agenda on our economy through coercive means," Moore said in a Dec. 8 news release.

Others called the company's decision a mistake.

"Vanguard's decision to pull away from [NZAM] is a misguided about-face at a time when financial institutions need to be taking a strong, collective approach to addressing financial risks from climate change," New York City Comptroller Brad Lander said in a statement. "Shielding itself from accountability thwarts the opportunity to meet this urgent moment in the best interests of their clients."

Initiative caused 'confusion'

Vanguard said it made the decision to withdraw to bring more clarity to investors.

Initiatives such as NAZM "can advance constructive dialogue, but sometimes they can also result in confusion about the views of individual investment firms," the company said. "That has been the case in this instance, particularly regarding the applicability of net-zero approaches to the broadly diversified index funds favored by many Vanguard investors."

The decision to leave the initiative came just days after 13 Republican state attorneys filed a protest with the Federal Energy Regulatory Commission, alleging that Vanguard's commitments to the climate initiative were running afoul of agency rules for investments in utilities.

Vanguard still says on its website that it joined NAZM to "engage with companies, policymakers, and other investment industry participants" about the transition to decarbonization. It also noted that it publishes annual reports to the Task Force on Climate-Related Financial Disclosures on its progress.

"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," Kirsten Snow Spalding, vice president of Ceres Investor Network at sustainability nonprofit Ceres, said in a statement. Ceres is a founding partner of NAZM.

But Spalding also said Ceres will continue to engage with the investment firm.

"We note Vanguard's continued commitment to offer net-zero investment products to their clients, to engage with the companies in their portfolios, and to engage policymakers on these issues," Spalding said.

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