Texas and ten other states recently filed a groundbreaking lawsuit against three asset management behemoths, taking them to task for a massive ESG (Environmental Social Governance) squeeze that violates antitrust law.
We have seen in recent years a number of well-earned attacks on ESG—a poor strategy for generating returns or achieving any meaningful improvement of the environment that additionally fails to honor the fiduciary duties owed to investors.
The nation’s largest asset managers are at the center of the ESG fight and perhaps the most in peril when it comes to legal pushback on their ESG efforts. You see, some of the nation’s largest asset managers have built a massive business—and avoided substantial regulatory and legal scrutiny—on the premise that they are mere passive investors who build index products for investors without influencing the day-to-day management of the companies they own. In reality, they are actively pushing ESG, signing on to various group climate commitments and other efforts to aggressively push the agenda of their CEOs or to bolster their record with left-wing activists and officials. Larry Fink, the CEO of BlackRock, which has over $10 trillion under management, has been known to engage in doubletalk, invoking corporate “purpose” in one breath while steamrolling large companies to impose his climate agenda in another.
When states have taken action to expose this game, the asset managers have had a tendency to scamper away. Vanguard, for instance, withdrew from a United Nations–affiliated banking alliance just days after thirteen states, led by Utah, protested the funds’ application to the Federal Energy Regulatory Commission for blanket authorization to acquire utility stocks.
The current Texas-led antitrust lawsuit marks a massive escalation in the pushback against the asset managers and presents a major—almost existential—threat to their ESG efforts.
The lawsuit names as defendants BlackRock, Vanguard, and State Street. They are not only three of the largest institutional investors in the world, but also the three largest shareholders of publicly traded U.S. coal companies, of which there are nine. BlackRock is the largest shareholder of six of the nine companies and the second largest of the remaining three. Vanguard is the largest shareholder of one of the companies and the second largest of six others. State Street is among the top five shareholders of seven of the companies. The three defendants are alleged to “have leveraged their holdings and voting of shares to facilitate an output reduction scheme, which has artificially constrained the supply of coal, significantly diminished competition in the markets for coal, increased energy prices for American consumers, and produced cartel-level profits” for themselves.
At base, the allegations in the complaint confirm what we have long known: net zero and net zero alliance commitments are basically a group agreement among market participants to limit production and restrain competition. At their core, these commitments are a promise by the signatories to align with set emissions allowances, aiming to sharply limit energy production from a particular industry by a date certain in the future, with intermediate targets published by the International Energy Agency or other UN-style intergovernmental organizations. Those who sign on to these group commitments are agreeing with each other to an organized, benchmarked set of allowances and metrics for how much to produce and how much to sell. Here, the ultimate goal is net zero greenhouse gas emissions by 2050. And while this lawsuit highlights coal, a similar dynamic is in play when it comes to oil and gas, use of airplanes, and even use cows for farming. (New York’s attorney general, Letitia James, actually filed a lawsuit against the U.S. subsidiary of JBS, the world’s largest producer of beef products, alleging that it engaged in deceptive practices by announcing its commitment to a net zero greenhouse gas target while continuing to raise and sell cattle and beef products.)
While these various ESG commitments and alliances have been forming and proliferating, they have created liability. That companies are not allowed to engage in these types of group agreements to limit production should be obvious from a basic understanding of antitrust law. But the asset managers and their friends on the Left have operated as if there is a “greater good” exception to our nation’s laws protecting competition. That notion is baseless. Even FTC Chair Lina Khan has admitted that there is no environmental justice exception to the antitrust laws.
So the states have ample cause to sue. And relief is not just about monetary damages. This case proceeds in part under Section 7 of the Clayton Act, the argument being that the joint ownership of shares in an industry by asset managers with this history of climate commitments and joint operation is a threat to competition. The primary relief under the Clayton Act is injunctive relief, including divestment of shares used in unlawful antitrust conduct. Here that would mean divestment from publicly traded coal companies.
But the stakes of this lawsuit, and a potential divestment order under the Clayton Act, are even higher for the asset managers. If the asset managers were to lose this coal case, the principle behind their defeat would follow them into other industries.
Therein lies the real peril to the asset managers. Sure, the asset managers are busy telling a tale about how divestment might cause a dislocation in a particular industry in the immediate aftermath of a court order, but what they are neglecting to acknowledge is that a divestment order would potentially wreck their index fund business and otherwise strike an existential blow to their operations. For companies built on selling index funds, divestment is a potential mortal blow, because even if they can somehow still sell modified market indexes in the face of a divestment order, it would be hard for wealth managers to choose modified products sold in the face of such an order, knowing that other asset managers sell products without limitations and regulators would be watching.
Don’t be surprised if at least one of the three asset managers in the case settles out early. That seems like the right move, given the potential wrecking ball their index-based businesses face. The defendants’ board members who are less personally invested than Larry Fink may well conclude that it is better to walk away than to cling to their net zero commitments and their ESG sales jobs. And who knows? Maybe Fink himself will see the writing on the wall.
The Texas-led lawsuit, in short, presents an existential threat to ESG. Do not be surprised if this turns out to be the beginning of the end of the ringleader era of ESG. To the extent there is demand for ESG funds, companies can market them and sell them as such. But they will have to stop using other people’s money, and everyday people’s retirement nest eggs, to push ideological agendas.