Vanguard announces exit from net zero climate investment alliance

ESG Developments This Week

In Washington, D.C.

The Fed and ESG

On December 2, the Federal Reserve’s board of governors released its proposed rule on climate risks for big banks, including its proposed environmental stress tests. The board asked for public comments:

“The Federal Reserve Board of Governors on Dec. 2 invited public comment on proposed principles for managing climate-related risks of banks with $100 billion or more in assets.

Six of the board’s seven members voted in favor of the move. They included Federal Reserve Chair Jerome Powell, who became chair under President Donald J. Trump. Powell was first appointed to the board by President Barack Obama.

One governor, Christopher Waller, dissented.

“I cannot support this issuance of guidance on climate change. Climate change is real, but I disagree with the premise that it poses a serious risk to the safety and soundness of large banks and the financial stability of the United States. The Federal Reserve conducts regular stress tests on large banks that impose extremely severe macroeconomic shocks and they show that the banks are resilient,” Waller, a Trump appointee, said in a statement.

Governor Michelle W. Bowman, another Trump appointee, made it clear that she wasn’t conveying her approval of the proposal in her Dec. 2 vote.

“While I support seeking public comment, this vote does not indicate my support for the finalization of this guidance. I will evaluate any future recommendation to finalize this guidance on its merits,” she said.

“The new principles contemplate additional obligations on firms to monitor and measure a broader set of climate-related risks, over indefinite time horizons. I look forward to public input on whether the guidance will improve safety and soundness at a reasonable cost.”…

“Regulators must issue guidance that addresses the growing threats to both individual banks and the stability of the entire financial system,” David Arkush, director of the climate program for the Ralph Nader-founded non-profit Public Citizen, said.

“There is no time for the Fed or other banking regulators to delay finalizing these rules.”

Phillip Basil, director of banking policy at Better Markets, praised the Fed’s stated commitment to working with the OCC and the FDIC.

“The effects of climate change present serious and complicated risks to our banking system, and this type of coordination between the banking agencies is critical to addressing those risks,” he said in a statement.

Not everyone shares that enthusiasm.

“Hooray for the courageous Chris Waller,” Hoover Institution economist John Cochrane told The Epoch Times in a Dec. 2 email.

Waller cast the lone dissenting vote.

“Chris is right that it is completely obvious that ‘climate risk’ does not conceivably imperil the financial system, or at least not with more than infinitesimal probability and a lot less than other dangers—war, sovereign debt collapse, pandemic, etc.,” Cochrane wrote in a subsequent post on his blog, The Grumpy Economist.

“Assume it means nothing as the Fed doesn’t have authority to do anything directly on this,” Boris Ryvkin, a corporate attorney who served as national security adviser for Sen. Ted Cruz (R-Texas), said in a post on Twitter.

Members of the public have 60 days to comment on the proposed principles….”

In the states

Arizona divests from BlackRock over firm’s ESG policies

On December 8, Arizona Treasurer Kimberly Yee (R) announced that the state’s Investment Risk Management Committee had completed its review of BlackRock – including Larry Fink’s own letters – and had decided to proceed with removing its funds from BlackRock’s management because of the firm’s ESG positioning:

“Arizona is forging ahead with its plan to pull the state’s funds from BlackRock due to concerns over the massive investment firm’s push for environmental, social, and governance (ESG) policies that have led other states to take similar actions.

Arizona Treasurer Kimberly Yee said in a statement released Thursday that the state treasury’s Investment Risk Management Committee (IRMC) began to assess the relationship between the state’s trust fund and BlackRock in late 2021. 

“Part of the review by IRMC involved reading the annual letters by CEO Larry Fink, which in recent years, began dictating to businesses in the United States to follow his personal political beliefs,” Yee wrote. “In short, BlackRock moved from a traditional asset manager to a political action committee. Our internal investment team believed this moved the firm away from its fiduciary duty in general as an asset manager.”

In response to those findings, Yee noted that Arizona began to divest over $543 million from BlackRock money market funds in February 2022 and “reduced our direct exposure to BlackRock by 97%” over the course of the year. Yee added that Arizona “will continue to reduce our remaining exposure in BlackRock over time in a phased in approach that takes into consideration safe and prudent investment strategy that protects the taxpayers.”

Although the state will continue to hold some BlackRock stock through shares in a passive index of the top 1,500 American corporations, Arizona will have “minimal direct exposure” to BlackRock amounting to “less than 1 tenth of one percent of our total assets under management” as of the end of November. Yee said that Arizona intends to vote its shares in the index in an effort to “change the political activism of BlackRock.””

Texas legislators subpoena BlackRock and other financial firms in ESG investigation

Last week, a Texas legislative committee subpoenaed BlackRock and other asset managers, plus proxy advisory service Institutional Shareholder Services (ISS), as part of an investigation of ESG policies at the companies. The companies ignored the committee’s previous request for documents. 

“In August, the Texas Senate Committee on State Affairs requested documents from the financial firms BlackRock, State Street, Vanguard, and Institutional Shareholder Services. The State Affairs Committee is studying the investment practices of financial services firms and how those practices affect the state’s public pensions. It is responsible for ensuring the state’s public pension funds are not being invested in furthering political or social causes.

Now, Texas has issued a subpoena to BlackRock to provide documents in person for failure to produce the requested records. Representatives of the asset manager are ordered to appear on December 15, the same day the State Affairs Committee has called to convene the entire committee for a hearing. The committee requested that the “Big Three” asset managers — BlackRock, State Street Global Advisors (State Street), and Vanguard — appear. They also want to speak with Institutional Shareholder Services (ISS).

The purpose, as mentioned above, is to discuss the effects of environmental, social, and governance (ESG) policies on the state’s pension programs….

ISS is at the meeting because they advise Texas on how to vote on the proxy shares the state maintains responsibility for. In some cases, ISS may be automatically voting for the funds. The committee wants to ensure its proxy votes are not being used to pass proposals that ultimately damage the economy or reputation of Texas. Every year thousands of shareholder proposals are submitted, and thanks to the SEC under the Biden administration, they are no longer required to relate to business operations.

There are proposal votes on equity audits, funding abortion travel, climate reporting, and dozens of other social and political issues. As State Financial Officers Foundation Chairman and Louisiana State Treasurer John Schroder has pointed out, ESG investing allows companies like BlackRock to bypass the legislative process and push political agendas through corporate decision-making without being accountable to voters. Derek Kreifels, CEO of the State Financial Officers Foundation, has made a similar observation. “Ultimately, ESGs will encompass everything the Left can’t get done through the legislative process or the courts,” he warned.”

North Carolina treasurer asks BlackRock CEO to resign over ESG commitments

Also last week, North Carolina State Treasurer Dale Folwell sent a letter to BlackRock CEO Larry Fink, asking him to resign his position over his dedication to ESG:

“The treasurer of one of the largest state pension funds in the U.S. is urging BlackRock CEO Larry Fink to resign from the investment firm over its environment, social, and governance (ESG) policies.

North Carolina State Treasurer Dale Folwell sent a letter to BlackRock’s board of directors calling for Fink to step aside because the CEO’s “pursuit of a political agenda has gotten in the way of BlackRock’s same fiduciary duty” to its investors. “A focus on ESG is not a focus on returns and could potentially force us to violate our fiduciary duty,” Folwell wrote.

He noted that the North Carolina Retirement System (NCRS), which is valued at roughly $111 billion, has invested roughly $14 billion through BlackRock in a variety of active and passive funds, in addition to $55 million passively invested in BlackRock’s stocks and bonds. He wrote, “There is no blue money or red money at the treasurer’s office, only green. As the fiduciary for NCRS, I seek not to be political, but mathematical.”…

Amid its broad push for ESG, BlackRock’s stance against investing in fossil fuels has been a particular point of controversy for its detractors. Folwell noted in his letter that in 2020, Fink “used BlackRock’s clients’ votes against two management-supported board members of ExxonMobil because of ‘insignificant progress’ towards green energy. Yet, ExxonMobil stock rose 60% in the 12 months since the board member election because of an increase in demand for oil.”

“BlackRock needs to be totally focused on returns for their clients, not on the political effort to ‘transform’ the economy to you vision of carbon zero. Fossil fuels will be the engine that drives the world’s economy for the foreseeable future,” Folwell told the BlackRock board.

In his letter, Folwell informed BlackRock’s board that the NCRS will begin voting the shares it has under the management of BlackRock in an effort to counteract the investment giant’s ESG push, but said “the existence of the proxy voting program does not mitigate the need for a new direction at BlackRock.”

Folwell’s letter to the BlackRock board concluded that Fink must leave the firm for it to refocus on its fiduciary duty to investors: “Given his dogged pursuit of these political objectives over a number of years, I’m skeptical that he would or could lead the necessary course correction. Having lost confidence in his leadership to responsibly steward investors’ resources, I request, quite simply, that he resign or be removed from the asset management firm’s leadership team immediately.””

On Wall Street and in the private sector

Vanguard announces exit from net zero climate investment alliance

Last week, the second-largest asset manager in the world and the world’s largest passive asset manager, Vanguard, announced that it had decided to leave a $66 trillion climate investment alliance. 

The move came after 13 Republican state attorneys general filed a motion last month asking the Federal Energy Regulatory Commission to hold a hearing on Vanguard’s plans to purchase a large number of shares in public utility stocks. Stephen Soukup, a market analyst, an opponent of ESG, and the author of “The Dictatorship of Woke Capital,” wrote that “to the best of my knowledge, this is the first time that a coalition of state officials has taken action against a single ESG-committed asset management firm that isn’t BlackRock.”

Vanguard said in its statement that “the move [to leave the climate alliance] had been in the works for several months.” The Financial Times reported the news on December 7:

“Vanguard is pulling out of the main financial alliance on tackling climate change at a time when Republicans in the US have stepped up their attacks on financial institutions that they say are hostile to fossil fuels.

With $7.1tn under management and more than 30mn customers as of October 31, Vanguard is the second-largest global money manager after BlackRock. The group said on Wednesday that it was resigning from the Net Zero Asset Managers initiative, whose members have committed to achieving net zero carbon emissions by 2050.

Vanguard, which mainly manages passive funds that track market indices, said the alliance’s full-throated commitment to fighting climate change had resulted “in confusion about the views of individual investment firms”.

“We have decided to withdraw from NZAM so that we can 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,” the Pennsylvania-based company said in a statement.

NZAM was founded in December 2020 and had 291 members managing $66tn in assets as of November. Last year NZAM joined an umbrella climate finance organisation, the Glasgow Financial Alliance for Net Zero (Gfanz) upon its launch last year under Mark Carney, the former Bank of England governor.

Vanguard will exit both groups. In a statement, NZAM said Vanguard’s decision was regrettable.”