Vanguard Group, the investment giant whose offices in Malvern, Pennsylvania, have been targeted by environmentalists demanding it pressure companies to stop burning carbon fuels, now faces backlash from states who say its efforts to address climate change threaten investment profits for pension funds and other clients.
Attorneys general for Texas, Ohio, Indiana, and 10 Southern and Great Plains states on Nov. 28 filed a protest with the Federal Energy Regulatory Commission (FERC), seeking to block Vanguard from buying electric-power utility company shares for the next three years.
They cited Vanguard’s attempts to pressure utilities into disclosing fossil-fuel pollution and its agreements with environmental organizations that want investors to push to eliminate natural gas and coal plants altogether. In a statement, Vanguard insisted it remains committed to collecting higher profits for its customers.
Vanguard’s index funds and other investment products own 8% to 10% of the nation’s publicly traded utility stocks, not to mention their bonds, according to U.S. Securities and Exchange Commission data. That includes more than $60 billion Vanguard has invested in just the 10 largest utility stocks, including Exelon, American Electric Power, and Duke Energy, for example.
“Yes, it would be a problem for the index funds” if the FERC stopped Vanguard from buying power companies, though Vanguard might be able to substitute stock options or other securities, said Dan Wiener, chairman of Adviser Investments in Newton, Mass., and a longtime Vanguard observer.
“This gets at the heart of what happens when index funds get too big,” he added, leaving them vulnerable to pressure from special interest groups and politicians.
BlackRock also under fire
Vanguard isn’t the only big investment company pressured to placate both climate activists and pro-fossil-fuel partisans. Florida on Thursday said it would withdraw $2 billion in stocks and bonds from Vanguard’s larger rival BlackRock, accusing the company of putting environmental concerns above profits.
“I don’t trust BlackRock’s ability to deliver,” Jimmy Patronis, the state’s chief financial officer, said in a statement. He said BlackRock boss Larry Fink “has leaned heavily into Environmental, Social and Governance standards to help police who should, and should not, gain access to capital,” a “social engineering project” that “has nothing to do with maximizing returns,” he said. “The Florida Treasury will be taking its business elsewhere.”
BlackRock, in a response, predicted that it will be Florida’s “political initiative” of dumping its “high-quality investments,” not BlackRock’s efforts to collect more data from carbon emissions or to encourage companies to add female and minority corporate directors, that will end up depressing the state’s investment returns, Reuters reported.
BlackRock is the largest U.S. investment company, with around $10 trillion managed from offices in New York and Princeton, plus back offices in Wilmington and other cities. Vanguard ranks No. 2, with around $8 trillion.
Even a spate of billion-dollar withdrawals won’t wreck such large companies, but the threat to pull assets is felt especially during slack times for the investment business, when fees drop as investment values fall.
Vanguard employs around 12,000 in the Philadelphia area, mostly at its headquarters near Malvern and nearby offices in Tredyffrin and East Whiteland Townships, Chester County, and Newtown, Delaware County. Vanguard ranks with Comcast, Merck, and Wawa among the largest corporate employers in the Philadelphia area, though its area headcount has changed little over the past decade, partly due to its practice of outsourcing work to contractors such as Infosys and Xerox. The company has acquired new office space in the area this year and says it is still hiring.
Vanguard and utility stocks
In their 16-page “motion to Intervene,” the states said FERC should consider whether to deny Vanguard’s request to renew the company’s federal authorization to buy utility stocks because the company “at the very least created the appearance” that it has violated a 2019 pledge to FERC that it would not “exercise any control” over day-to-day power company decisions or push companies to take actions that would affect electricity prices.
But Vanguard “breached its promises” to keep out of utilities’ business “by engaging in environmental activism and using its financial influence to manipulate the activities of the utility companies in its portfolio,” the attorneys general charge.
They want FERC to review their accusations that Vanguard is acting “contrary to the public interest” by joining Net Zero Asset Managers Alliance, a group whose goal includes eliminating net fossil-fuel emissions before 2050, and Ceres Investor Network, which seeks to “accelerate action on climate change.” They also complain that Vanguard is pressuring companies to disclose power plant pollution and switch to non-carbon fuels.
For example, according to the motion, a Utah-based energy company owned by billionaire Warren Buffett’s Berkshire Hathaway Inc. faces a Vanguard-supported demand that the company disclose pollution from its “carbon-intensive” natural gas and coal plants. If those plants were shut, Utah energy rates would go up, harming consumers, the attorneys general argued.
The motion says American Electric Power Co. Inc., which serves more than five million customers in 11 states, has already agreed under pressure from environmentally minded investors to phase out natural gas and coal, which the attorneys general say will drive up power prices and reduce system reliability, to the detriment of consumers.
The motion concludes that FERC needs to measure just how far Vanguard is going to pressure these and other utilities to shut down low-cost carbon-fuel power plants for noneconomic reasons, despite its previous promise not to do so. FERC did not respond to a request for comment.
Vanguard spokesman Netanel Spero, sidestepping a request to comment directly on the states’ allegations, said in an emailed statement that the company sees its role as “to promote long-term value creation for investors in our funds, leaving management and policy decisions to companies and policymakers.”
He added, “We look forward to working through the regulatory process.”
