(Bloomberg) -- BlackRock Inc., Vanguard Group Inc. and State Street Corp. were sued by a group of states led by Texas for allegedly breaking antitrust law by boosting electricity prices through their investments, in the highest-profile lawsuit yet against the beleaguered ESG industry.
Texas Attorney General Ken Paxton and 10 other states claim the money managers combined their market clout and membership in climate groups to pressure coal producers to cut output. Shortages have caused Texans and residents of the other states to pay higher power bills, according to the lawsuit, filed Wednesday in federal court in Texas.
“Competitive markets — not the dictates of far-flung asset managers — should determine the price Americans pay for electricity,” the attorneys general wrote in the complaint.
The Republican-led states, including West Virginia and Montana, are asking the court to bar the three largest US investment firms from using their stock in coal companies to vote on shareholder resolutions and take other steps in a way that restrains output and limits market competition.
BlackRock said in a statement that the lawsuit “undermines Texas’ pro-business reputation” and added that “the suggestion that BlackRock invested money in companies with the goal of harming those companies is baseless and defies common sense.”
Vanguard and State Street didn’t have an immediate comment on the lawsuit.
The complaint marks the culmination of a years-long investigation by GOP officials who have taken aim at Wall Street’s efforts to address climate change, the main pillar of the environmental, social and governance strategy. Pressure has mounted on investment firms since last year when state attorneys general warned them that Americans’ savings shouldn’t be used to “push political goals” during the shareholder voting season.
In response, climate advocates say environmental risks are financial risks and that addressing them is among investors’ fiduciary responsibilities.
Paxton accused the investment firms of working together to cause industrywide reductions in coal production, which has resulted in higher energy prices for American consumers. He cited a 1914 federal law, the Clayton Antitrust Act, that outlaws buying shares with the result of substantially reducing competition.
The lawsuit alleges that BlackRock, Vanguard and State Street used their shareholdings in coal companies, including Peabody Energy Corp. and Arch Resources Inc., to press management to cut their carbon emissions. This started in 2021 at the height of the ESG boom.
The investment firms also joined groups such as Climate Action 100+ and Net Zero Asset Managers Initiative that press companies to cut their carbon emissions. In effect, the investors formed “a syndicate and agreed to use their collective holdings of publicly traded coal companies to induce industrywide output reductions,” according to the suit.
The suit repeatedly refers to allegations that BlackRock, Vanguard and State Street have the power through their large shareholdings to constrain the supply of coal, which significantly diminishes competition in the market and produces “cartel-level profits” for the firms.
Climate-finance coalitions are “voluntary associations and therefore don’t include any form of collusion and coercion, so it’s hard to see a legal basis for this claim,” said Lisa Sachs, director of sustainable investment at Columbia University Law School. But “coal-financed politicians are now using the bully pulpit to scare financial institutions, which won’t in any way benefit the coal sector and will harm the constituents these AGs purport to represent.”
US coal producers have been under pressure in recent years from cheaper natural gas and renewable energy. In Texas, for example, coal now accounts for less than 10% of the state’s generating capacity, down from 18% in 2020, according to the Electric Reliability Council of Texas.
Republican lawmakers have been critical of Wall Street’s efforts to include environmental and social factors in their financial calculations. They have launched probes and introduced anti-ESG bills — many of which have failed — and some states pulled money from investment firms. US banks and asset managers have begun to talk much less about ESG topics publicly, and some have left climate groups.
State Street Global Advisors said in February that it quit Climate Action 100+ because of requirements that are inconsistent with the firm’s “independent approach” to shareholder voting and speaking with companies. BlackRock said that only a unit that contains most funds focused on decarbonization will remain a member of CA100+.
Vanguard left the the Net Zero Asset Managers Initiative in 2022, while BlackRock and State Street Global Advisors remain members of the group, which is part of the Glasgow Financial Alliance for Net Zero.
In the suit, the states acknowledge the departures, but they don’t “change the reality that defendants’ holdings threaten to substantially reduce competition in violation of Section 7 of the Clayton Act.”
The complaint comes after Texas Lieutenant Governor Dan Patrick praised BlackRock Chief Executive Officer Larry Fink earlier this year at a summit focused on investments in the state’s fragile power grid.
The case is Texas v. BlackRock, 24-cv-00437, US District Court, Eastern District of Texas (Tyler).
(Bloomberg Philanthropies’ work with the Sierra Club’s Beyond Coal campaign has helped retire over 70% of the nation’s coal plants since 2011. NZAM is a part of the Glasgow Financial Alliance for Net Zero. GFANZ is co-chaired by Mark Carney, who is the chair of Bloomberg Inc.’s board and a former Bank of England governor, and Michael R. Bloomberg, the founder of Bloomberg News parent Bloomberg LP.)
(Adds comment from BlackRock in fifth paragraph and university director in 13th.)
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