Texas Lawsuit Targets Wall Street Firms Over Anti-Coal Practices

A lawsuit filed in November 2023 by Texas Attorney General Ken Paxton and ten other Republican attorneys general accuses three major Wall Street asset managers—BlackRock, Vanguard, and State Street—of forming a so-called “investment cartel” to manipulate coal production and increase energy costs for consumers. The suit is part of a broader Republican initiative to challenge what they term as anti-competitive behavior related to environmental, social, and governance (ESG) practices.

Since 2022, Republican lawmakers have been scrutinizing significant financial institutions, sending letters to banks, pension funds, and asset managers, urging them to disclose potential antitrust violations linked to their climate commitments. Denise Hearn, a senior fellow at the Columbia Center on Sustainable Investment, noted the turmoil and uncertainty this scrutiny has caused within the financial ecosystem. “Everyone wondered, ‘OK, when are they actually going to drop a lawsuit?’” she said.

The lawsuit claims that the three asset managers collectively pressured coal companies to reduce production while simultaneously increasing their profits. The allegations suggest that by joining climate alliances such as the Net Zero Asset Managers Initiative and Climate Action 100+, these firms manipulated market dynamics to achieve higher revenues at the expense of coal output. The case has garnered significant attention not only from climate advocacy groups but also from the financial sector, as it could reshape the landscape of passive investing in the United States.

Legal Proceedings and Reactions

A U.S. District Court judge in Tyler, Texas, recently allowed the lawsuit to proceed, dismissing only three out of the twenty-one counts. The judge’s ruling indicates that there is sufficient evidence for the case to go to trial. In response, BlackRock stated: “This case is not supported by the facts, and we will demonstrate that.” Vanguard and State Street echoed similar sentiments, with Vanguard pledging to “vigorously defend against plaintiffs’ claims,” while State Street described the lawsuit as “baseless and without merit.”

The Texas attorney general’s office has not provided comments to media inquiries regarding the lawsuit. The allegations detail how these asset managers built significant stakes in U.S. coal producers, claiming they collaborated to decrease coal output and increase transparency regarding climate risks, resulting in what the lawsuit terms “cartel-level revenues and profits” for the asset managers involved.

Critics of the lawsuit, including Hearn, question the validity of the claims. “If the coal companies were all colluding together to restrict output, then shouldn’t they also be violating antitrust laws?” she asked. The underlying argument suggests that the asset managers’ influence over coal production was an exercise of concentrated ownership rather than a direct collusion among coal producers.

Implications for Climate Alliances and Financial Practices

The implications of this lawsuit are vast and could redefine the relationship between financial entities and climate action. If the asset managers prevail, it might alleviate pressures on other climate alliances and reinforce the alignment of business practices with the goals of the Paris Agreement. Conversely, if the lawsuit succeeds, it could radically alter the operational framework of the financial industry regarding passive investments.

The case has also drawn criticism from pro-free-market commentators, with the editorial board of The Wall Street Journal labeling the Texas-led lawsuit as “misconceived” and its rationale as “strained.” The lawsuit challenges collaborative efforts among financial players aimed at climate action and raises novel claims regarding “common ownership,” wherein asset managers hold stakes in competing firms within the same sector.

Research conducted by Harvard Business School economists earlier this year found no evidence of traditional antitrust violations among major climate alliances. The study highlighted that financial firms participating in climate initiatives were more likely to set emissions targets and engage in climate-positive lobbying. Peter Tufano, a co-author of the study, emphasized that the arguments put forth in the lawsuit need to be rigorously tested, noting that existing research casts doubt on many allegations against these alliances.

As the world increasingly mandates climate-related disclosures—evident from a tally by CarbonCloud showing at least 35 countries accounting for over half of global GDP now requiring such transparency—the U.S. political landscape appears to diverge sharply from these global trends. California, for instance, plans to enforce reporting requirements for large businesses on their emissions starting in 2024.

Despite the political pressure prompting some companies to retreat from their climate commitments—a trend referred to as “greenhushing”—the financial realities suggest that investment decisions remain driven by profitability rather than political ideologies. 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 outcome of this landmark lawsuit will likely set significant precedents for the future of both climate alliances and the financial industry’s role in addressing climate change.