Vanguard, the world’s second-largest asset-management firm, is outperforming its competitors because it has limited ESG standards.
- Environmental, Social, and Governance metrics (ESG) are a financial shorthand for a company’s approach to environmental impact, social issues, and transparency and describe how companies approach investment strategies.
- ESG has become an important buzz term in the business world as companies lean into “stakeholder capitalism” and focus on how power and influence can be a force for progress worldwide.
- Asset managers like BlackRock CEO Larry Fink have given ESG high regard as they push for greater social responsibility from corporations.
- Vanguard may be bucking the trend. Financial services company Morningstar Inc. says it was the only of the top five firms in Europe that grew in 2022 as ESG investments underperformed, Bloomberg reports.
Why It’s Important
ESG caused division in 2022—both because ESG investments faltered and lost value over the course of the year and because prominent critics of the practice began appearing. As we previously reported, Tesla CEO Elon Musk has repeatedly criticized ESG metrics as a “phony scam.” Tesla’s internal examination of ESG practices found flawed methodology and limited real-world impact.
Florida Governor Ron DeSantis announced last month that the state would pull $2 billion in assets from BlackRock, one of the largest investment companies in the world, in response to the company’s ESG policies. BlackRock defended its ESG investing as necessary in the face of the realities of climate change, economic stress, and a massive transformation expected in the coming decades.
Vanguard has been slowly backing out of some of its climate commitments, backing out of Net Zero Asset Managers in December due to pressure from investors and Republican lawmakers. It appears to benefit from its less stringent ESG requirements than its colleagues.
“Vanguard benefited from being more exposed to fossil fuels than its peers. Morningstar estimates the firm incorporates ESG into about 1% of its European ETFs, compared with roughly 17% of BlackRock’s iShares products. The fact that Vanguard’s ESG business is relatively limited helped cushion capital losses,” says Bloomberg.