ESG, Richard Young, Jack Bogle, and You

By JohnKwan @ Shutterstock.com

Vanguard, one of America’s largest mutual fund companies, is, according to Will Hild in The Wall Street Journal, violating an agreement with the Federal Energy Regulatory Commission (FERC) by meddling in the affairs of regulated utilities with its ESG policies. Hild writes:

Americans are paying sky-high electricity rates and companies like Vanguard are making the problem worse. This week my organization, Consumers’ Research, joined 13 state attorneys general in a complaint against Vanguard at the Federal Energy Regulatory Commission. With more than $7 trillion in assets under management, the Pennsylvania-based investment firm has publicly committed to pressuring utilities to lower their emissions. Vanguard appears to be not only putting America’s critical infrastructure at risk but violating its agreement only to control utility company shares passively. To protect U.S. consumers and safeguard national security, FERC should investigate the company’s conduct.

The three biggest asset managers—Vanguard, State Street and BlackRock—wield enormous clout over the companies in their investment portfolios. That influence is primarily exercised in board meetings and elections. The big three can cast nearly 25% of the votes in any director election at S&P 500 companies. That leverage means CEOs listen when asset managers make demands.

Vanguard isn’t shy about doing so, and it has made climate its top priority. In March 2021 the company joined a group of other asset managers in the Net Zero Asset Managers Initiative—a U.N.-linked organization dedicated to transforming the global economy to reach net-zero carbon emissions. Before joining the initiative, each member must commit to implementing a “stewardship and engagement policy” consistent with “achieving global net zero emissions by 2050.” Asset managers like Vanguard then use their clients’ assets—not their own—to “accelerate the transition.”

Committing to net zero isn’t an abstract goal. The Net Zero Asset Managers Initiative requires its members to prescribe specific emissions targets for industry sectors, especially utilities. The International Energy Agency’s net-zero road map envisions eliminating fossil fuels from electricity generation by 2050. That would require every American utility to remake its operations radically.

Under FERC rules, asset managers aren’t permitted to meddle in a utility’s operations. Vanguard is aware of this; that’s why the company promised FERC at its August 2019 authorization hearing it would be a passive investor in the utilities in which it holds shares. The commission granted authorization, and Vanguard’s investment has been anything but passive, actively pushing corporate managements to pursue net-zero targets and shutter coal and natural-gas electricity generation.

Why would Vanguard join an outfit like the Net Zero Asset Managers Initiative and risk violating the law? It could leave net-zero decisions up to individual companies, none of which are required by law to reach such targets.

The answer may be that such asset managers have a major conflict of interest. These companies want to manage blue-state pension funds—say, for New York or California—which are some of the largest in the country. With control, however, come demands to push net-zero policy across their assets. Doing so effectively allows them to extend their environmental activism into other states.

On Sept. 21, New York City Comptroller Brad Lander sent a letter to BlackRock CEO Larry Fink—one of the city’s pension asset managers. In his letter, Mr. Lander details Blackrock’s net-zero commitments and cites IEA’s pathway toward zero fossil-fuel production. He then asks Mr. Fink to “provide a detailed approach to keeping fossil fuels reserves in the ground.” If Vanguard isn’t already under similar pressure from its own blue-state clients, it will be soon.

The consequences of such politicking could hardly be more severe. Consumers saw electricity prices rise 14% over the past 12 months. The rest of the country can’t afford to adopt the environmental policies of New York and California.

Vanguard’s founder, Jack Bogle, never in his wildest dreams created the index mutual fund to meddle in the affairs of the companies owned by it for investors. It was meant to be a way to passively invest in the market. Simple. In the forward to Mr. Bogle’s book, Bogle on Mutual Funds, my father-in-law Richard Young writes, “Congratulations! You have made one of the wisest investment decisions of your life…Jack Bogle’s basic premise is the model of simplicity and integrity: Give investors clearly defined investment products at the right price.”

Notice the words “clearly defined.” The goals of ESG investing are so hazy that Elon Musk’s Tesla has been removed from ESG indexes, while ExxonMobil is one of their top holdings. Read more about the oddities of ESG here: