BlackRock, other asset managers must face Republicans' climate conspiracy suit

(CN) — A Texas federal judge ruled Friday that a group of Republican state attorneys general can proceed with most of a lawsuit accusing three of the world’s largest investment companies of violating antitrust laws by participating in climate initiatives.

A coalition of 11 Republican attorneys general, led by Texas Attorney General Ken Paxton, filed a lawsuit in the U.S. District Court for the Eastern District of Texas last year accusing BlackRock, State Street and Vanguard — known as the “Big Three” asset managers — of conspiring to pressure coal companies they own stock in to lower output.

The plaintiffs take issue with the investment companies’ participation in groups like Climate Action 100+ and the Net Zero Asset Managers initiative, which call on investors to use their investment power to help lower greenhouse gas emissions.

U.S. District Judge Jeremy Kernodle rejected the asset managers’ arguments that they were merely engaged in lawful passive investment.

The Donald Trump appointee found the plaintiffs had sufficiently claimed that the companies engaged in anticompetitive conduct to decrease coal output, such as by voting against board directors at coal companies they deemed not sufficiently committed to climate goals.

Although Kernodle said it was a “close call,” he found that there was sufficient circumstantial evidence that the asset managers engaged in a coordinated conspiracy with each other.

“It’s not a stretch to infer that defendants believed they were morally compelled to fight ‘climate change’ and ‘global temperature increases’ because they joined climate initiatives that committed to taking necessary action on climate change, reducing coal emissions, and limiting global warming,” Kernodle wrote. “But even well-intentioned moral motives are no excuse for antitrust violations.”

Kernodle noted the attorneys general also say the asset managers had an economic motive to conspire to lower coal output in order to raise coal prices, thereby increasing profits for coal companies they own stock in.

The lawsuit is part of a larger conservative battle against ESG investing. Short for environmental, social and governance, ESG investing involves considering in investment decisions factors like a company’s impact on the environment, its relationships with employees and communities and the quality of its leadership and internal controls.

The practice is aimed at promoting sustainable and ethical business practices, but many Republicans argue it prioritizes political and social agendas over financial returns, potentially harming investors and the economy.

Kernodle acknowledged that the plaintiffs’ Sherman Antitrust Act claim is unusual, but he ultimately said there was evidence that the asset managers had acted to restrain trade.

“While the alleged restraint’s structure is unique, plaintiffs plausibly allege that its purpose and effect is not: it is a ‘concerted attempt to reduce output,’” Kernodle wrote.

Instead of accusing the asset manager of a horizontal agreement among competitors to reduce output, which is automatically unlawful, Kernodle said the attorneys general are instead claiming “a horizontal agreement among investors to pressure competitors in another industry to reduce output.”

Five of the attorneys general also bring claims against BlackRock under their states’ consumer protection laws, accusing the investment firm of falsely marketing certain funds as not pursuing an “ESG investment strategy” when in fact, they claim, these funds owned shares in coal companies and BlackRock was using its power from those shares to advance a climate agenda.

Kernodle dismissed the claims against BlackRock under the Louisiana Unfair Trade Practices Act and the Nebraska Consumer Protection Act, as those laws do not cover securities transactions.

But he ruled the other consumer protection claims can continue, finding the plaintiffs had properly argued both that BlackRock had made deceptive statements about the ESG status of the funds and that reasonable investors would consider that information important.

“As plaintiffs say, an investor may avoid ESG-based funds either ‘because of a political disagreement’ or ‘because of a belief that ESG priorities will diminish the fund’s performance, or both,’” Kernodle wrote. “And it is plausible that an alleged misrepresentation pertaining to a fund’s ESG involvement is important to a reasonable shareholder and may alter their decision to invest in the fund.”

Texas Attorney General Ken Paxton celebrated Kernodle’s ruling in a statement.

“BlackRock, State Street, and Vanguard — three of the most powerful financial corporations in the world — created an investment cartel to illegally control national energy markets and squeeze more money out of hardworking Americans,” Paxton said. “Today’s victory represents a major step in holding them accountable. I will continue fighting to protect Texas and defend America’s energy independence from this unlawful conspiracy.”

In an email to Courthouse News Service, a spokesperson for Vanguard said the firm “looks forward to the opportunity to vigorously defend against plaintiffs’ claims and will continue to give investors the best chance for investment success.”

A spokesperson for State Street said, “Despite the plaintiffs’ efforts to advance a new and dangerous antitrust theory, this lawsuit remains baseless and without merit. It poses unnecessary risk to investors and energy markets.There is no collusion here, and we remain confident that the facts and legal substance are on our side.”

BlackRock did not respond to a request for comment on Kernodle’s ruling.