The Texas-led lawsuit against the three biggest asset managers for allegedly manipulating energy markets — and the anti-ESG movement generally — is not only forcing investors to act against their fiduciary duties by encouraging them to ignore data-driven risks to their holdings, but also costing Republican-dominated states enormous sums in lost revenues.
According to sources, the movement is politically-driven for short-term gains for the fossil fuel industry and will damage the U.S.’ ability to compete globally, as rivals in Europe and Asia pull ahead with sustainable investments, which remain in demand, and innovations.
Recent high-profile news like the case led by the Texas Attorney General against BlackRock, Vanguard Group, and State Street Global Advisors; Indiana’s retirement fund dropping BlackRock; and Walmart abandoning DEI programs, are indicative of the battle taking place across the country.
Andrew Behar, CEO of the nonprofit corporate responsibility group, As You Sow, told Democracy Now that the bill has not only already led to pension funds underperforming in Texas — impacting the ability of teachers, police and firefighters, and federal workers to retire — but has led to around 3,000 job losses and $600 million in direct costs.
“These anti-ESG crusades are really anti-business and anti-freedom, whereas basically just basic good business practice says you want to assess and address risk, and that’s what they’re trying to suppress,” added Behar.
As Institutional Investor reported in 2023, some pension funds have been fighting back, including the Kentucky County Employees Retirement System. The CIO argued that the requirement that the fund divest from companies boycotting the energy sector, including BlackRock and others, was inconsistent with its fiduciary obligations.
Following this, on December 20, the Republican-led House Judiciary Committee requested information from many of the country’s largest asset managers about their involvement with the Net Zero Asset Managers alliance, the Glasgow Alliance for Net Zero, and Climate Action 100+, alleging managers inclusion was an attempt to form cartels and work with climate activists. Several asset managers and banks have distanced themselves from these groups in recent months, with Citi the latest high profile organization to do so.
But despite the multipronged attacks, early reports suggest that ESG measures are not going away — just hiding in plain sight. Sources expect more ‘green hushing,’ where corporates continue to abide by programs aimed at reducing emissions, for example, because the strategy is sound. The difference now is that these corporates, and investment firms managing portfolios, will no longer shout about it from the rooftops as they have in recent years. ESG investments remain in vogue among retail investors, particularly younger generations, and asset management profits will likely take a hit if they remove these funds from their lineups.
“Companies can still understand the benefit of providing a living wage for your workers and providing for decent work — not just because it is good for workers but because there’s a business case and it’s good for the value of that business,” said Greg Hershman, head of U.S. policy at the Principles for Responsible Investment (PRI), a U.N.-supported investment network.
“The idea that you’re going to consider extreme weather or think about how the workforce impacts the value of your business is not new, all we’ve really been helping people do is professionalize that and systematize how to think about these issues that are hard to put on a balance sheet,” he added.
Hershman stressed that, “The swinging pendulum of policy and regulation absolutely has an effect. It increases the cost of business; it creates friction in the marketplace and makes people question if they are going to get dinged for a thing that was perfectly acceptable and encouraged two months ago and now is discouraged by the administration.”
The Case Against BlackRock
Since getting entangled in the ESG debate, BlackRock has been very clear about its stance on the matter — arguing that its investment approach is driven by choice, performance, and research as a fiduciary. (Through passive and other strategies, the firm still holds massive stakes for its clients in multiple fossil fuel companies in Texas and around the country.)
“An orderly transition would result in higher economic growth compared with no climate actions and would create a more constructive macro environment for financial returns for our clients overall,” the firm states on its website.
Despite this clear language the asset manager has been the brunt of many attempts by institutions seeking to distance themselves from ‘woke investing.’ The Indiana Public Retirement System (INPRS) for example voted this month to replace BlackRock as one of its portfolio managers because of the manager’s continued “ESG-focused agenda.”
The November 28 antitrust-led lawsuit from Texas attorney general Ken Paxton against BlackRock, Vanguard and State Street contended that the three had been actively conspiring to manipulate energy markets in the state away from coal, and intentionally driving up costs for consumers.
Having acquired large stakes in the state’s public coal companies, the three were then said to be wielding their great influence to improve their own revenue gains at the expense of investors, Paxton said.
“Using their combined influence over the coal market, the investment cartel collectively announced in 2021 their commitment to weaponize their shares to pressure the coal companies to accommodate ‘green energy’ goals. To achieve this, the investment companies pushed to reduce coal output by more than half by 2030.”
The claim added that the firms also deceived investors that chose non-ESG funds to maximize profits by pursuing ESG strategies to the contrary and forming a cartel. Texas was joined in the case by ten other red states.
According to Drake Morgan, counsel in Crowell and Moring’s antitrust department, the lawsuit demonstrates that the states are advancing past the ‘talking’ phase to suing, and that they are piggybacking on the incoming Trump administration’s plan to go after ESG investment groups is beginning in earnest.
“What we’re seeing is a significant shift in the enforcement environment, and that antitrust risk is now something that should be at the forefront anytime anybody is considering ESG policies,” he said. “But that doesn’t change things in a fundamental way, because ESG or DEI or any other form of standard setting is just a form of collaboration for a business purpose and should be subject to ordinary antitrust compliance practices that a company has.”
The accusations are an attempt to leverage a degree of legal uncertainty and risk in lieu of definitive clarification in precedent. But the suggestion is that most actors will continue to pursue ESG strategies despite this additional antitrust risk.
“Antitrust compliance just wasn’t a focus when people were developing their ESG policies a few years ago, but it’s always been something that antitrust lawyers have been aware of as a potential risk,” added Morgan. “People are understandably trying to figure out how to continue to achieve their goals while mitigating risk. Some of the withdrawals and realignments you’ve seen are variations on that, but that doesn’t mean people are going to be abandoning ESG.”
The attacks are not just against large asset managers like BlackRock but have been directed against smaller players, too. In October 2023, II reported that Republican state attorneys general had included Responsible Alpha — a research and consulting firm — in antitrust claims taken against the larger players. Gabriel Thoumi, CEO and founder, said at the time that the firm would lose some outside investment and as a direct result would prevent the creation of ten additional jobs. Unlike BlackRock and its peers, firms like Responsible Alpha lack the resources to mount sigfnificant legal reactions to such motions.
Sustainability and Diversity Are Cost-Effective
The political headwinds are emanating from Republican-controlled states, but critics say investors and managers should remember that it is often simply good business to be mindful of ESG or DEI, and poor economics to ignore these factors. There are simple examples: solar power is better business than gas and variety in the workplace mitigates groupthink and encourages diverse thinking and opinions.
As a result, restrictive policies at the state or federal level are liable to cost both businesses and investors. U.S. pension funds have expressed frustration because they believe that anti-ESG policies are actually bad for business and particularly bad for their investors, according to Eileen O’Connor of the Rockefeller Foundation.
“We’re already seeing it in some conservative states where there’s proposed anti ESG legislation, some of those — even Republican pension fund managers — are pushing back and saying that it’s going to cost their pensioners billions of dollars, both in fees to convert and to pull out of investments, but also in losses over the next few years,” O’Connor told Bloomberg TV.
Some institutions are plowing ahead. In February 2024, II reported that the California Endowment, for example, a private non-profit focused on expanding access to affordable and quality healhcare, announced intentions to move its entire $4 billion in assets into mission-aligned investments.
“If United States businesses don’t start investing in the technologies that are going to abate greenhouse gas emissions and also adapt to a warming climate we are going to be losing out as a country and as an economy.”
Countries across Europe and Asia, particularly China, are heavily investing in technology like battery storage and electric vehicles and converting energy systems because they believe that climate change is real and caused by human activities, including how food is grown, and the use of fossil fuels.
“If there is a chilling effect from this anti-ESG legislation it’s that it is business that’s going to lose out, and also consumers and the economy in general.”
Similarly, much of the legislation is aimed at DEI, with lawmakers arguing that these policies are bad for business and that employees hired under diversity programs can be less qualified and not as likely to benefit from advanced training or support. “That is actually also counterfactual, because the facts show that when you have a diverse workforce with inclusive leadership that listens to those employees and that takes into account their views, you actually add value to the company,” added O’Connor. “You actually create better outcomes on decisions because of the diverse viewpoints of those people.”
ESG and DEI may be under attack, but the economic argument for these programs suggests that they are only going to retreat into the shadows, not dissapear entirely.
