Texas Lawsuit Targets Wall Street Firms Over Coal Practices

Texas Attorney General Ken Paxton and a coalition of 10 Republican state attorneys general have initiated a lawsuit against three major asset management firms—BlackRock, Vanguard, and State Street. Filed in November 2023, the suit alleges that these firms are part of an “investment cartel” aimed at reducing coal production, thereby inflating energy costs for consumers. This case could significantly affect the ongoing debate over environmental, social, and governance (ESG) initiatives in the financial sector.

Since 2022, Republican lawmakers have been scrutinizing major financial institutions, sending letters to banks, pension funds, and asset managers about possible antitrust violations related to their ESG commitments. Denise Hearn, a senior fellow at the Columbia Center on Sustainable Investment, noted that this scrutiny has created considerable uncertainty within the investment community. “Everyone wondered, ‘Okay, when are they actually going to drop a lawsuit?’” she stated.

Allegations and Legal Context

The lawsuit claims that the three asset managers, through their significant holdings in U.S. coal companies, conspired to decrease coal output. This alleged collaboration included joining voluntary initiatives such as the Net Zero Asset Managers Initiative and Climate Action 100+, although all three firms later withdrew from these alliances. The suit contends that these actions led to “cartel-level revenues and profits” for the asset managers while pressuring coal companies to disclose more climate-related data.

“You could say, ‘Well, if the coal companies were all colluding together to restrict output, then shouldn’t they also be violating antitrust?’” Hearn questioned.

The lawsuit was bolstered by a supporting brief from the Trump administration’s Department of Justice and the Federal Trade Commission in May. Recently, a U.S. District Court judge in Tyler, Texas, decided not to dismiss the case against the asset managers, indicating that the evidence presented warranted a trial, although three out of 21 counts were dismissed.

In response, BlackRock stated, “This case is not supported by the facts, and we will demonstrate that.” Vanguard and State Street echoed similar sentiments, calling the allegations “baseless” and affirming their intent to “vigorously defend” against the claims.

Implications for the Financial Sector

The outcome of this lawsuit is being closely monitored by various stakeholders, including climate alliances and sustainability organizations. If the asset managers prevail, it may alleviate pressures on other firms involved in climate coalitions and reinforce the alignment of financial practices with international climate goals. Conversely, a ruling in favor of the coalition of states could fundamentally alter how passive investment is conducted in the U.S.

The Wall Street Journal editorial board criticized the Texas-led lawsuit as “misconceived” and its theories as “bizarre,” expressing concern over the potential ramifications for collaboration among financial institutions regarding climate initiatives. Hearn noted that regardless of the ruling, the case could set precedents for how similar lawsuits are approached in the future, especially concerning the concept of “common ownership” where asset managers hold stakes in competing firms.

Recent research by Harvard Business School economists examined major climate alliances and found no evidence of traditional antitrust violations. This study noted that financial firms engaged in such alliances were more likely to adopt emissions reduction targets and implement climate-friendly practices.

In contrast, globally, there is a growing trend towards climate-related disclosures. According to data from CarbonCloud, at least 35 countries, representing over half of the world’s GDP, now mandate some form of climate reporting. California is set to enforce requirements for large businesses to measure and report their emissions starting next year.

Despite the political tensions in the U.S. surrounding climate initiatives, many financial institutions continue to focus on profitability. Hearn remarked, “Banks are going to do what they’re going to do, and they’re going to lend to the most profitable or to the most growth-oriented industries. Right now, that’s not the fossil fuel industry.”

The legal proceedings will unfold in the coming months, with potential implications that could reshape the landscape of ESG investing and the broader financial ecosystem.