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“This news is likely to trigger a domino effect in the US, where the polarisation of ESG has reached untenable levels,” Hortense Bioy, Morningstar global director of sustainability research, told Financial News.

In a statement on 7 December, Vanguard said it wanted to provide “clarity” to investors, claiming that NZAM had resulted in confusion about “the applicability of net-zero approaches to the broadly diversified index funds”, which represent the bulk of its assets under management.

Vanguard and other fund groups with major operations in the US have found themselves caught in the middle of an anti-ESG backlash spearheaded by Republicans, who have accused them of pursuing their green agenda at the expense of investor returns.

Bioy said while other signatories may be “tempted to quit” they will have to think long and hard about the possible implications for their business.

“While Vanguard mostly serves US retail investors, other managers have among their clients asset owners who have themselves made net zero commitments. That’s where the rubber hits the road.

“As easy as it was for Republican states to boycott asset managers because of their Net Zero commitment, we can imagine that it will be as easy for some investors to pull assets from managers who withdraw their net zero commitment.”

However, Bioy said Vanguard’s exit also has implications for similar industry initiatives to tackle climate change, including the Mark Carney-backed Glasgow Financial Alliance for Net Zero.

GFANZ, which was co-founded by the former Bank of England governor Mark Carney in April 2021, rolled out stricter criteria this summer, which would have required members to align with the UN Race to Zero Campaign.

But it scrapped this requirement in November, after several major US lenders, including JPMorgan, Morgan Stanley and Bank of America threatened to quit over fears they could be sued for failing to meet its stringent decarbonisation commitments.

“This is bad news, not only for NZAM, but for GFANZ, which tried to accommodate some signatories a few weeks ago by distancing itself from Race to Zero. Was this effort in vain?”

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