The Net Zero Asset Managers (NZAM) initiative, comprised of 301 asset managers with $59 trillion in assets under management (AUM), is unlikely to generate meaningful change. However, the low barriers of entry to NZAM render membership essentially meaningless. Vanguard, for example, is one of the world’s largest asset managers by AUM and holds a significant number of shares in BP and Chevron, two of the world’s top polluters. This begs the question: how was Vanguard allowed to join NZAM to begin with?
NZAM is easy to leave
It is also easy to exit, which further reduces accountability. Vanguard left the initiative late last year, citing the need to provide clarity to investors and the company’s desire to speak independently. This followed broader political pressure from the Republican Party in the US, which views adherence to environmental, social, and governance (ESG) principles as violating the fiduciary duty of asset managers. Asset managers are not known for supporting extra regulation, let alone voluntary regulation. The extent to which Vanguard’s business is impacted by leaving NZAM will be a sign of the initiative’s importance.
The ease with which asset managers can join and leave the initiative diminishes the value of being a signatory, reducing the initiative’s ability to hold asset managers accountable. While it is possible for asset managers to join the initiative, they need not act in accordance with its purpose. Membership in NZAM is ultimately not linked to actual achievement.
What actually works
In contrast, examples like Engine No. 1, a small investment firm that proposed nominees to ExxonMobil’s board with cleaner energy credentials, demonstrate that NZAM membership has no bearing on asset managers’ ability to effect change. Blackrock and Vanguard supported Engine No. 1’s assessment that Exxon was not doing enough to transition to cleaner energy. As significant shareholders in Exxon, their support was instrumental in appointing some of the proposed board members, despite pushback from Exxon. Engine No.1 is not a member of NZAM, and the campaign was not coordinated through NZAM.
Such instances highlight the growing importance of proxy voting and shareholder activism as a means of compelling companies to act sustainably. Harvard Law School found that from 2021 to 2022, shareholder submissions of environmental proposals to companies increased by 46% during the proxy voting seasons. Asset managers should focus more on examples like Engine No. 1 and effective stewardship rather than signing up for initiatives that look good on paper. Real accountability is most likely to come from clients rather than important-sounding initiatives. If an asset manager’s investments do not align with their clients’ principles, clients are free to withdraw their money and invest elsewhere. If asset owners like pension funds and sovereign wealth funds are demanding more ESG-focused funds, asset managers must reflect this changing demand to maintain good relations with their clients. Asset owners should judge managers on results, not commitments, if they are serious about ESG issues.
Initiatives like NZAM are unlikely to be effective in curtailing environmentally harmful investment practices. Asset managers should focus more on effective stewardship, such as proxy voting and engagement, and less on signing up for initiatives that look good on paper.
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