Eleven states filed a complaint against BlackRock Inc., State Street Corp. and the Vanguard Group Inc. for allegedly both working to constrict coal markets through anti-competitive practices and misleading investors in funds that do not take environment, social and governance factors into consideration.
Attorney generals from the 11 states filed the complaint in U.S. District Court for the Eastern District of Texas, Tyler Division, on Wednesday, with lead representation from the Buzbee Law Firm, based in Austin, Texas.
The states allege that the asset managers took “substantial” holdings in U.S. coal companies, which they leveraged to press the companies to focus on green energy goals, such as reducing coal output by more than half by 2030. The plaintiffs also claim that the asset managers used positions in organizations such as the Climate Action 100+ and the Net Zero Asset Managers Initiative to signal their work to reduce coal output, which the plaintiffs allege led to cost increases for coal-powered electricity.
“For the past four years, America’s coal producers have been responding not to the price signals of the free market, but to the commands of Larry Fink, BlackRock’s Chairman and CEO, and his fellow asset managers,” the complaint states in its opening. “As demand for the electricity Americans need to heat their homes and power their businesses has gone up, the supply of the coal used to generate that electricity has been artificially depressed—and the price has skyrocketed.”
The lawsuit is led by Texas Attorney General Ken Paxton and includes the attorneys general of Alabama, Arkansas, Indiana, Iowa, Kansas, Missouri, Montana, Nebraska, West Virginia and Wyoming. The plaintiffs are seeking billions in damages, according to a press release by the Buzbee law firm.
In the complaint, the attorney generals also call on the asset managers to divest their investments in coal company stock and for the firms to be restrained from any further “deceptive, or misleading acts or practices” related to the positioning of funds.
BlackRock said via emailed statement that its holdings in energy companies are regularly reviewed by regulators and that “we make these investments on behalf of our clients, and our focus is on delivering them financial returns. The suggestion that BlackRock has invested money in companies with the goal of harming those companies is baseless and defies common sense. This lawsuit undermines Texas’ pro-business reputation and discourages investments in the companies consumers rely on.”
State Street wrote in a statement that the firm “acts in the long-term financial interests of investors with a focus on enhancing shareholder value. As long-term capital providers, we have a mutual interest in the long-term success of our portfolio companies. This lawsuit is baseless and we look forward to presenting the facts through the legal process.”
Vanguard did not respond to request for comment.
Per the complaint, BlackRock, Vanguard and State Street held $108.787 billion, $101.119 billion and $35.736 billion in coal investments, respectively, as of February 15, 2022.
Clayton Act
For its key argument, the complaint cites Section 7 of the Clayton Antitrust Act of 1914, which prohibits the acquisition of stock when “the effect of such acquisition may be substantially to lessen competition.”
By having substantial holdings in coal companies, the complaint alleges that the asset managers “acquired the power to influence the policies of these competing companies and bring about a substantial lessening of competition in the markets for coal.”
According to the attorneys general, as publicly traded coal companies have reduced output, smaller, private companies have increased production. Those firms, according to the complaint, struggle to meet the demand and cannot get the financing and loans to needed to increase capacity.
The complaint details the companies in question, such as Peabody Energy, NACCO Industries and Warrior Met Coal, and the percent of shares held by the asset managers: 30.43%, 10.85% and 31.62%, respectively, as of June 30.
The plaintiffs refer extensively to public comments by high-level executives at the asset managers, including Fink, regarding the promotion of efforts to reduce carbon dioxide emissions and increase the market share of the clean energy industry. The complaint also notes stock voting positions the firms took that allegedly supported reductions in output and divulges information regarding climate disclosures.
Clean Energy Initiatives
The complaint refers to all three firms joining the Net Zero Asset Manager Initiative, intended to reduce the CO2 emissions from coal more than 58% between 2020 and 2030. Vanguard withdrew from that initiative in 2022.
In addition, the complaint notes that BlackRock and State Street joined the Climate Action 100+, an organization whose stated goal is to reduce coal output by more than half by 2030. BlackRock and State Street eventually withdrew from the Climate Action 100+; Vanguard never joined it.
Climate Action 100+ has more than 600 signatories, representing more than $68 trillion in assets under management. The Net Zero Asset Manager Initiative represents more than 325 signatories with $57.5 trillion in AUM.
In the complaint, the attorneys general also argue that BlackRock, in particular, misled investors who were seeking to invest in ”non-ESG” funds by using those holdings to advance its climate goals.
“In addition to joining with the other two major institutional asset managers to bring about a reduction in the output of coal, Defendant BlackRock went further—actively deceiving investors about the nature of its funds,” the complaint states. “Rather than inform investors that it would use their shareholdings to advance climate goals, BlackRock consistently and uniformly represented its non-ESG funds would be dedicated solely to enhancing shareholder value.”
Last year, 26 attorneys general filed a lawsuit seeking to overthrow the Department of Labor’s final rule permitting ESG factors to be used when selecting retirement plan investments. That lawsuit was dismissed by the U.S. District Court for the District of Northern Texas but is currently under appeal to the U.S. 5th Circuit Court of Appeals.
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Tags: Asset Management, BlackRock, ESG, State Street, Vanguard