London | Vanguard is walking out of the world’s largest climate-finance alliance, marking the coalition’s biggest defection to date as US Republicans step up their threats against firms deemed hostile toward the fossil-fuel industry.

Vanguard’s decision followed a “considerable period of review,” according to a company statement on Wednesday (Thursday AEDT).

Mark Carney has tried to reassure investors amid concerns that they faced growing legal risks for appearing to avoid carbon-intensive sectors. Bloomberg

Withdrawing from the Net Zero Asset Managers initiative, which is a sub-unit of the Glasgow Financial Alliance for Net Zero, “will help provide the clarity our investors desire” about everything from the role of index funds, to financial risks in the context of climate change, the firm said.

Mark Carney, the former Bank of England governor who is the chief architect of GFANZ, said earlier this year the alliance had enjoyed considerable growth, and now represented about 550 members with roughly $US150 trillion ($224 trillion) of assets in total.

He also sought to dismiss reports that some members had grown uneasy with the alliance’s structure, amid concerns that they faced growing legal risks for appearing to avoid carbon-intensive sectors.

“It is unfortunate that political pressure is impacting this crucial economic imperative and attempting to block companies from effectively managing risks – a crucial part of their fiduciary duty,” said Kristen Snow Spalding, vice president of the Ceres Investor Network, a founding partner of the Net Zero Asset Managers initiative.

Vanguard indicated that its decision rested on a desire to maintain the freedom not to restrict its investment options.

Initiatives such as the net-zero alliance “can advance constructive dialogue, but sometimes they can also result in confusion about the views of individual investment firms”, it said.

“That has been the case in this instance, particularly regarding the applicability of net-zero approaches to the broadly diversified index funds favoured by many Vanguard investors.”

The Pennsylvania-based firm went on to say that its withdrawal from NZAM was part of a “continuous assessment of our participation in external organisations and their ongoing alignment with Vanguard’s mission and perspectives on investing”.

Republican politicians have made clear that they plan to step up their attacks on firms suspected of being anti-oil, or “woke”. House Republicans are set to hold congressional hearings on the subject, and a number of anti-ESG bills will soon be introduced in states across the country.

Earlier this year, it emerged that two pension firms and an investment consultant dropped out of GFANZ, which is co-chaired by Michael Bloomberg.

That coincided with reports that JPMorgan Chase, Bank of America and Morgan Stanley were mulling defection after a requirement “to phase down-and-out unabated fossil fuels, including coal” was introduced by Race to Zero, the UN-backed entity that underpins GFANZ. A swift clarification followed to soften that language, ostensibly in an effort to appease members.

Lawyers advising the finance industry have warned that concerns around legal risks are justified.

If a bank or asset manager has “proclaimed” an intention to reach net zero by a given date, “but now realises it won’t make that goal,” it’s in danger of Federal Trade Commission enforcement action, DLA Piper said on its website back in August. That “could result in significant investigative and litigation costs, large financial penalties, and negative publicity,” it said.

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