The JMP Weekly Report

Texas Attorney General Ken Paxton announced the launch of a lawsuit against investment giants BlackRock, Vanguard and State Street, joined by 10 other states, accusing the asset managers of using their positions in climate-focused investment initiatives to manipulate coal markets and drive up the cost of energy.

In statements received by ESG Today from BlackRock and State Street, the investment companies described the suit as “baseless,” with a BlackRock spokesperson adding that it “defies common sense.”

The announcement marks the latest in a series of moves in an ongoing anti-ESG movement by Republican politicians in the U.S. Texas has been one of the most active states in anti-ESG initiatives, with actions including having several asset managers placed on a list for potential divestment for allegedly “boycotting” energy companies, as well as joining a multi-state alliance to “protect individuals from the ESG movement,” through actions such as blocking the use of ESG in all investment decisions at the state and local level, and prohibiting state fund managers from considering ESG factors in their investments on behalf of the state.

Several Republican states have launched ESG-focused lawsuits over the past several months, often targeting BlackRock as the largest global investment management company, and a leading voice in the investment community on climate and energy transition-related investment themes, including Mississippi earlier this year, and Tennessee in December 2023.

In the new lawsuit, the Attorneys General claim that the asset managers acquired large shareholdings in major coal producers in the U.S., and used their combined influence to coerce the companies to cut coal production to accommodate clean energy investment goals, resulting in higher energy costs for U.S. consumers.

The suit notes that BlackRock, Vanguard and State Street collectively held substantial shares in major coal companies, including more than 30% stakes in Peabody Energy and Arch Resources, which together account for approximately 30% of the coal produced in the U.S. With the large holdings in place, the suit alleges that the firms violated the Clayton Act, which prohibits the acquisition of shares of companies in which ““the effect of such acquisition may be substantially to lessen competition.”

The suit adds that the firms “effectively formed a syndicate and agreed to use their collective holdings of publicly traded coal companies to induce industry-wide output reductions,” by joining the Net Zero Asset Managers Initiative (NZAM) in 2021, and with BlackRock and State Street also joining Climate Action 100+, noting that each initiative requires commitments from asset managers to engage with portfolio companies to align with climate goals, including the International Energy Agency’s (IEA) outlook that require CO2 emissions from coal to fall by 58% by 2030, and thermal coal output to fall 50% by 2030.

Notably, the asset mangers have since exited or significantly reduced their participation in the climate initiatives, often citing the group’s overly prescriptive requirements. For example, Vanguard exited NZAM in 2022, saying that it aimed “to make clear that Vanguard speaks independently on matters of importance to our investors,” and State Street left CA100+ earlier this year.

Similarly, BlackRock shifted its participation in Climate Action 100+ to its international unit, citing a new strategy by CA100+ that would require signatories to commit to use client assets to pursue emissions reductions in portfolio companies. In a letter to CA100+ published on the asset manager’s website, BlackRock said that “the money BlackRock manages is not our own—it belongs to our clients—and BlackRock is committed to providing clients around the world with choices to support their unique and varied investment objectives.” BlackRock’s website also carries a ‘2030 net zero statement,’ which states that “our role is to help them navigate investment risks and opportunities, not to engineer a specific decarbonization outcome in the real economy.”

Despite the asset managers’ decisions to leave the initiatives, however, the suit says that withdrawal “does not change the reality that Defendants’ holdings threaten to substantially reduce competition,” or “negate the ongoing and future threat of Defendants’ coordinated anticompetitive conduct or absolve Defendants of their legal liability for past violations.”

In a statement announcing the launch of the suit, the Texas AG’s office said:

“Deliberately and artificially constricting supply increased prices and enabled the investment companies to produce extraordinary revenue gains. This conspiracy violated multiple federal laws that prevent a major shareholder, or a group of shareholders, from using their shares to lessen competition or engaging in other anticompetitive schemes. Further, the companies broke Texas antitrust and deceptive trade practices laws.”

In the statement to ESG Today, BlackRock’s spokesperson said:

“BlackRock is deeply invested in Texas’ success. On behalf of our clients, we have billions invested in Texas energy, partnering with the state to attract investments into the Texas power grid and helping millions of Texans retire with dignity.

“BlackRock’s holdings in energy companies are regularly reviewed by federal and state regulators. We make these investments on behalf of our clients, and our focus is on delivering them financial returns.

“The suggestion that BlackRock has invested money in companies with the goal of harming those companies is baseless and defies common sense. This lawsuit undermines Texas’ pro-business reputation and discourages investments in the companies consumers rely on. “

State Street’s spokesperson said:

“State Street acts in the long-term financial interests of investors with a focus on enhancing shareholder value. As long-term capital providers, we have a mutual interest in the long-term success of our portfolio companies. This lawsuit is baseless and we look forward to presenting the facts through the legal process.”

Other states joining the suit include Alabama, Arkansas, Indiana, Iowa, Kansas, Missouri, Montana, Nebraska, West Virginia, and Wyoming.