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Vanguard Gets Extra ETF Billions After Largely Shunning ESG

By Alastair Marsh

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Vanguard Group, which quit the world’s biggest climate-finance alliance in December, was the only major ETF provider to post an increase in European assets last year thanks to its lower exposure to environmental, social and governance strategies, according to Morningstar Inc.

The world’s second-largest asset manager is “an outlier in the European context,” Jose Garcia-Zarate, associate director of passive strategies at Morningstar Inc., said in an interview.

An analysis by the market researcher shows that Vanguard was the sole exchange-traded fund provider of the industry’s top five firms to see its European business grow in absolute terms last year, in large part because of “its minimal exposure to ESG in a year when ESG underperformed mainstream investments.”

Vanguard benefited from being more exposed to fossil fuels than its peers, according to Zarate. 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,” Garcia-Zarate said.

A spokeswoman for Vanguard declined to comment.

Vanguard’s European assets under management grew to €79.6 billion from €79.1 billion. Assets managed by BlackRock’s iShares products slipped to €585.8 billion from €616.9 billion, Morningstar estimates.

“Against very challenging financial market conditions, the European ETF market proved remarkably resilient in 2022,” Morningstar said.

It’s unusual for asset managers operating in Europe to place as little emphasis on ESG as is the case with Vanguard, Garcia-Zarate said. And unlike in the U.S., where bans against ESG investing introduced by the Republican Party have made it harder for firms to pursue the strategy, Europe’s entire regulatory framework is designed to steer the investment industry toward greener, fairer fund allocations.

So asset managers operating in Europe and the U.S. generally “have to deploy very different marketing strategies on either side,” Garcia-Zarate said. “In Europe you talk to investors all about your ESG credentials,” and then “the marketing message has to be completely turned around when you talk to American investors.”

Vanguard, however, “takes the same approach on both sides of the Atlantic,” he said.

In billions of eurosSource: Morningstar

Net Flows

AUM
2021
2022
2021
2022
iShares 67.2 44.2 616.9 585.8
Amundi 20.0 4.7 189.1 170.6
Xtrackers 18.3 -3.9 154.3 131.5
Vanguard 9.9 11.6 79.1 79.6
UBS 7.2 0.9 88.3 77.4

Vanguard made headlines last month when it announced it was walking out of the Net Zero Asset Managers initiative, which is a sub-unit of the Glasgow Financial Alliance for Net Zero. The decision marked the biggest defection from the climate-finance alliance, which was convened by former Bank of England Governor Mark Carney in early 2021.

The investment manager, which has about 80% of its portfolio assets in index-tracking funds, said it couldn’t commit to net zero because its business model doesn’t allow it to “choose the securities in a fund or dictate a portfolio company’s strategy or operations.”

Before quitting NZAMi, Vanguard had the lowest net-zero alignment of all members, the alliance said last year. And an October report by environmental think tank Universal Owner found that the net-zero claims Vanguard made were difficult to verify.

Despite last year’s underperformance, investment clients are still channeling money into European ESG ETFs. Morningstar estimates that 65% of all flows into the region’s ETFs went into ESG products in the fourth quarter. By comparison, that figure was just 14% in 2019, the researcher said.

And despite its growth last year, Vanguard’s European presence remains dwarfed by that of BlackRock, whose iShares assets under management in the region are more than seven times the size of Vanguard’s ETFs, according to Morningstar.

“Investors overwhelmingly favor ESG as a long-term trend,” Garcia-Zarate said. “But in 2022 — when ESG did worse than mainstream assets — that helped Vanguard.”

Pictured: The Vanguard Group headquarters in Malvern, Pennsylvania. (Image: Bloomberg)

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