A US court’s decision last week not to dismiss an anti-ESG case against BlackRock, State Street Investment Management and Vanguard could have big implications for responsible investment globally, according to a sustainable investment academic.
A federal district court judge denied the request by the three firms, which are being sued by Texas attorney general Ken Paxton over their approach to climate stewardship.
Paxton alleges that the asset managers used “their combined influence over the coal market to weaponise their shares to pressure the coal companies to accommodate ‘green energy’ goals by halving coal output by 2030”.
That reduction in output, the case argues, drives up the price of coal and therefore hurts consumers.
Altogether, he argues this breaks Texas and federal antitrust laws, as well as Texas’s rules on consumer protection.
The lawsuit is hugely significant for the broader sustainable finance industry, explains Denise Hearn, a resident senior fellow at Columbia University’s sustainable investment centre in New York.
“For two years, we had a lot of rhetoric around anti-trust collusion and ESG cartels within the financial institution alliances and non-profits that were facilitating investor coordination,” she says.
Hearn is referring to Republican lawmakers accusing groups like Climate Action 100+ and the Net Zero Asset Owner Alliance of flouting competition rules by coordinating investor requests and expressing the shared expectations of their members.
US-based responsible investment body Ceres was also caught in the crossfire, and was subpoenaed alongside big asset managers.
Most recently, the Science Based Targets initiative (SBTi) and disclosure platform CDP were subpoenaed last week by Florida’s attorney general, James Uthmeier, as part of an investigation into alleged “deceptive trade practices”.
In a statement, Uthmeier said he was considering whether the pair “violated state consumer protection or antitrust laws by coercing companies into disclosing proprietary data and paying for access under the guise of environmental transparency”.
Last week also saw finance officials from 21 US states write to 25 asset managers expressing “deep concern” over the “erosion of traditional fiduciary duty” in the country’s capital markets.
The investment arms of BlackRock, Vanguard, State Street, Fidelity, JP Morgan, BNY, Bank of America, AllianceBernstein, Invesco, Franklin Templeton and Northern Trust were among those to receive the letters.
They have been given until 1 September to “demonstrate [their] commitment to a fiduciary model grounded in financial integrity [rather than] political advocacy” if they want to retain business relationships with the states.
The letter asks them to “abandon the practice of framing deterministic future outcomes as long-term risks to justify immediate ideological interventions through corporate engagement or proxy voting” and commit “not to use passive investment vehicles for activist proxy voting or corporate engagement”.
Voting and engagement should have “a singular focus on shareholder value” and not “environmental or social goals imposed by activists”, and managers should refrain from awarding net-zero and nature-aligned mandates, according to the requests.
Hearn observes that, while there have been many such letters, subpoenas and investigations in recent years, the Texas case is the first actual lawsuit.
“That matters because no one was sure where this was all going: if it was just an effort to chill the collaboration efforts, or whether there would actually be litigation.”
Implications for stewardship and transition finance
It’s important to note that Friday’s ruling does not decide the outcome of the case in any way – it just indicates the court sees some merit in the plaintiff’s argument.
That’s also the position taken by the Federal Trade Commission and the Department of Justice, who issued a joint statement of interest in the case back in May.
Hearn describes the accusations as “legally and factually flawed for various reasons”, but says if the court rules against the asset managers, “it has major implications for the notion of investor stewardship and collaboration”.
“That’s particularly so for transition finance and transition plans, and all those things that have really animated the sustainable finance space for the last few years, because they currently rely on these practices.”
The plaintiff must now prove that the passive funds’ voting and engagement efforts were collusive and directly influenced their portfolio companies, which in turn drove up prices for consumers.
Forced divestment?
Ironically, one of the remedies proposed by Paxton’s team to mitigate the alleged damage is that the index funds should divest from coal companies.
“That’s what climate activists have been asking for for years,” notes Hearn.
A senior figure at one large UK-based asset owner described the suggestion as “a big, big deal”.
“You’re effectively telling people who own index funds that they need to sell out of securities and still follow that index,” said the exec, who asked not to be named.
“So you’re introducing unnecessary risk from a tracking perspective, as well as sidelining asset owners who should be free to have a seat at the table with these companies.”
Hearn also points out the market volatility that would be introduced if large passive investors were forced to sell out of the same companies at the same time.
Paxton welcomed the court’s ruling as a “major victory against BlackRock, State Street and Vanguard”.
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