US asset managers diverge from foreign rivals on climate

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Last year I wrote about an unusual lawsuit filed by 13 Republican-led states against three top US asset managers. The suit alleged that BlackRock, Vanguard and State Street had pressured coal companies to cut production in pursuit of climate goals. The money managers insisted that they’d done no such thing.

Yesterday, Vanguard bowed out of the legal fight with a settlement under which it will pay $29.5mn without admitting wrongdoing. It will also make several new commitments to protect against “any attempt . . . to push a woke agenda that puts American energy at risk”, as Texas attorney-general Ken Paxton put it.

Among those promises was a pledge to steer clear of climate alliances like the Net Zero Asset Managers initiative. In fact, Vanguard and most of its big US peers had already quit that group in an effort to minimise legal and political risks. Why aren’t their foreign counterparts following their example?

Pension pressure keeps NZAM afloat

“We commit to embark with determination and ambition on a journey, and to challenge and seek to overcome the constraints we face.”

It sounds like a line from a John F Kennedy speech about the Apollo programme. These are actually the closing words of the original “commitment statement” of the Net Zero Asset Managers initiative, through which most of that sector’s biggest names signed up to support the Paris Agreement’s climate goals.

It turned out that some of them were more committed to that ambitious journey than others. Last January, NZAM suspended operations following a series of exits by several of its biggest members, pending consultations on a new approach.

It was reasonable to wonder whether the alliance would now fade into oblivion, as have counterpart bodies for the banking and insurance sectors. But this one seems to have life in it yet.

Down but not out

On Wednesday NZAM published an updated list of 254 members who have signed up to its revised commitment statement. That’s well down from the 331 it had at the start of last year.

Most of the big US asset managers are now conspicuously absent amid a Republican backlash against “woke” investing. This is a big loss, considering the unrivalled scale of the US asset management sector. The US is home to 15 of the world’s 20 biggest asset managers.

But most of the biggest ones outside the US are still members. Nearly all the top European names, including Amundi, L&G, Allianz Global Investors and the asset management arms of BNP Paribas and UBS, remain on board. So do Japanese market leaders Sumitomo Mitsui, MUFG and Nomura. So too, the asset management businesses of Canada’s Brookfield and Australia’s Macquarie.

Why haven’t the asset managers followed the lead of their banker and insurer cousins by junking this initiative? The obvious answer is pressure from their big customers: long-term institutional investors such as pension funds, known in the trade as “asset owners”, which outsource much of their investment work to asset management companies.

Know your customer

While many in business and finance have tired of the net zero agenda, asset owners — especially in Europe — are growing more concerned about climate risks. In recent weeks, 53 of them, with an aggregate $3.7tn under management, signed an open letter to asset managers urging them to stay part of NZAM.

Some pension funds have started pulling money from asset managers who they think are not taking climate change seriously. In the past few months BlackRock has lost two Dutch pension fund mandates, worth a combined €19bn ($22bn), for this reason. State Street suffered the same thing earlier last year with the loss of a £28bn ($38bn) mandate for the UK’s People’s Pension fund.

The risks are not confined to Europe. In November, New York City’s top finance official recommended that three of its biggest pension funds move over $42bn from BlackRock over its approach to climate change.

“The way asset owners think about climate risk, and the way they expect their managers to support them on that journey to achieve appropriate investment returns that are at risk — that has not changed,” Rebecca Mikula-Wright, chair of NZAM’s steering committee, told me. This was “definitely a very big factor” behind many asset managers’ decision to remain members, she said.

Emergency surgery

Even so, to keep them on board, the alliance has had to make some sharp cuts to that rousing commitment statement. The most notable casualty is the pledge to achieve net zero emissions from all assets under management by 2050, ratcheting up towards that goal through a series of interim targets. This element had been a major target of attack from US Republicans, who claimed that it could lead asset managers to compromise on their fiduciary duty to maximise investor returns.

Under the new version, NZAM members are still required to set targets “consistent with the global goal of net zero greenhouse gas emissions”, but they now have much more discretion on what form these targets will take, and all mention of 2050 has been dropped.

The altered language wasn’t enough to win back departed US members such as BlackRock, Vanguard and JPMorgan Asset Management. More sector heavyweights including Franklin Templeton, Invesco and HSBC Asset Management, which were still members before last year’s suspension, have now dropped out.

Some other big firms are trying to have it both ways. State Street, Wellington, Columbia Threadneedle, DWS and T Rowe Price have all withdrawn their US businesses from NZAM, but have retained membership for their European-focused units.

They argue this is a matter of reflecting divergent client preferences in different regions. The risk is that they damage their credibility with Republican politicians and European pension trustees alike. Sometimes there’s just no pleasing everyone.

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