ESG has been and remains a serious concern for corporate executives. However, the role that it plays as a part of the corporate risk equation has changed. From a time not that long ago where companies were under pressure to establish their ESG credentials and promote ESG objectives, many companies now face an opposite politically charged backlash, that, among other things, has pushed some companies to walk back their ESG-related initiatives. For example, just this past week Walmart became the latest company to drop its DEI program in response to right-wing pressure, joining similar moves by Ford, Harley-Davidson, and Lowe’s, among others.
In the latest example of ways that politically-motivated activists are attempting to turn companies’ ESG initiatives against them, last Wednesday a groups of eleven states’ attorneys general led by Texas AG Ken Paxton filed a federal court suit against Blackrock, Vanguard, and State Street, alleging that the three institutional investors conspired to restrict the availability of coal, to the alleged detriment of consumers, and in alleged violation of federal and state antitrust laws. A copy of the Texas AG’s November 27, 2024, press release about the lawsuit can be found here. A copy of the state AGs’ complaint can be found here.
Background
Blackrock, Vanguard, and State Street are three of the world’s largest institutional investors. The AGs complaint alleges that collectively the three investors own significant shareholdings in the nine largest U.S. coal companies. The complaint cites the three firms’ collective ownership percentages of the coal companies ranging from under ten percent to over thirty percent. The three investors’ collective ownership percentages of the two largest coal companies – Arch Resources and Peabody Energy – responsible for, respectively, 17.2% and 13.2% of all U.S. coal production – are 34.1% and 30.43%.
The complaint alleges that with each of the three investors’ individual ownership interests, each of the three firms “acquired the power to influence the policies for the [coal] companies and bring about a substantial lessening of competition in the markets for coal.” But, the complaint alleges, the three companies “have not just acted alone,” but rather have “publicly announced their commitment to use their shares to pressure the management of all the portfolio companies in which they held assets to align with net-zero goals,” including the reduction of carbon emissions from coal by 50% by 2030.
The three investors, the complaint alleges, “effectively formed a syndicate and agreed to use their collective holdings of publicly traded coal companies to induce industry-wide output reductions.” Working through organizations like Climate Action 100+ and Net Zero Asset Managers the three investors allegedly coordinated their alleged anticompetitive conduct. Though the complaint notes that Black Rock and State Street publicly withdrew from Climate Action 100+, the withdrawal “does not change the reality that Defendants’ holdings threaten to substantially change competition to substantially reduce competition in violation of Section 7 of the Clayton Act.”
The complaint alleges that the three companies used their “immense influence” to “coerce management” to reduce the production of coal, as a result of which the supply of coal has been “artificially constrained,” resulting in “increased energy prices” and in “cartel-like profits for Defendants.” Defendants’ acquisition and use of their shareholdings thus, the complaint alleges, violated both Section 7 of the Clayton Act and State antitrust laws, while their “syndicate” allegedly yielded “supra-competitive profits for themselves and their portfolios” in violation of the Sherman Act and state antitrust laws.
The complaint notes that while the three investors have “publicly defended their anticompetitive scheme with appeals to environmental stewardship” their activities which had the effect of lessening competition are “not saved” because there may be social or economic considerations that may be deemed beneficial. Quoting FTC Chair Lena Kahn, the complaint asserts that the antitrust laws do not turn a blind eye to an illegal deal just because the parties commit to some unrelated social benefit.
The complaint contains a further allegation against BlackRock, alleging that the firm “actively deceived investors about the nature of its funds.” While the firm “consistently and uniformly represented that its non-ESG funds would be dedicated solely to enhancing shareholder value.” But, the complaint alleges, Blackrock “routinely violated its pledges to investors, using all of its holdings to advance its climate goals.”
The complaint seeks injunctive relief to “put an end to Defendants’ illegal practices and restore free and open competition in the coal markets,” as well as damages and civil penalties.
Discussion
The AGs’ lawsuit has only just been filed and it remains to be seen whether or not it will prove to be meritorious. Nevertheless, there are certain things that can be said about the lawsuit.
For starters, I think it is worth noting that the eleven state AGs that collectively launched this lawsuit all are red state politicians. The lawsuit itself represents the latest effort by conservative political activists and politicians to try to punish economic actors for pursuing policy goals with which the activists and politicians disagree. It is noteworthy that the AGs filed their lawsuit in the Eastern District of Texas. As a result of a concerted effort involving judicial appointments in the district, the district now has a reliably conservative bench, as a result of which conservative activists have been able to use the courts to block policies with which they disagree and to advance right-wing priorities, as discussed here.
The Texas AG’s press release quotes the AG as saying that “Texas will not tolerate the illegally weaponization of the financial industry in service of a destructive, politicized ‘environmental’ agenda.” So, in order to prevent this from happening, the Texas AG and his red state colleagues seek to weaponize the federal courts and the antitrust laws in the service of their own politicized agenda.
I will say this. Just a short while ago, there was a working consensus that companies that failed to position themselves as prepared to advance ESG goals risked finding themselves as the target of climate and social justice activists’ ire and perhaps even as the target of ESG-related litigation. The pendulum began to swing in a different direction when companies that were alleged to have overstated their ESG credentials were accused of “greenwashing.” The pendulum swing gained momentum as conservative activists began targeting companies for advancing an active ESG agenda, a development that caused many companies to go silent about ESG, in a process dubbed “greenhushing.”
Now companies and other economic actors who pursued ESG initiatives are being actively targeted, both in publicity campaigns and in conservative activist-led litigation. The net result is that the nature of ESG as a corporate risk has in a very short time completely changed, as the activists seek to impose a cancel culture that punishes economic actors whose policy goals differ.
In the meantime, the “anti-woke” movement is proving to be every bit as self-righteous and censorious as the supposed “woke” movement the conservative activists oppose. (And by the way, the word “woke” long ago ceased to have any meaning other than as a bogey man for conservative politicians to rail against.)
There are other ironies at work here. Active enforcement of the antitrust laws is usually associated with liberal/progressive activists. Historically, at least, it was opposed by conservatives as anti-business. Yet here is a troop of undeniably conservative politicians not only enthusiastically wielding the antitrust laws cudgel but quoting Biden administration appointee and antitrust scourge Lina Kahn in the process. Go figure.