Texas Tries a New Tactic to Kill ESG

Ah, lawfare. If the controversy over ESG investing isn’t settled politically, plenty of folks on both sides seem to want the matter resolved in the courts. The latest entry is Texas Attorney General Ken Paxton, who last week filed suit on behalf of 11 deep-red states against investment giants BlackRock, State Street and Vanguard for allegedly colluding to reduce the output of coal companies in which they hold significant stakes.

The battle over the rights or wrongs of prioritizing environmental, social and governance goals in investing has long been fought on the financial pages and in academic literature. Small surprise that it’s also being fought in the courts. Earlier this year, a Texas federal judge refused to dismiss an action by airline pilots who allege that the committee that manages their retirement accounts is violating its fiduciary duty by pursuing ESG investment goals. Meanwhile, in July, a federal appellate panel sent back to the trial court for further proceedings a lawsuit challenging the Biden administration’s sorta-kinda-maybe-pro-ESG rules for retirement plan managers under ERISA.

But unlike most anti-ESG litigation, the Texas suit (as we’ll call it) does not assert a breach of fiduciary duty. The claim, instead, is that the defendants have violated antitrust law. According to the lawsuit, as energy demand has risen, the financial companies tamped down on production — which they can do because they hold enormous stakes in the nation’s largest coal producers. The investment firms have done all this, the lawsuit says, in service of the “E” in ESG because they believe “that concern for the climate confers a license to suppress competition.”

The claim that Big Finance’s ESG commitments might raise antitrust issues has been around for a while. Yet the Texas lawsuit feels a little late for the party.

Part of the difficulty is that ESG carries so many different and, at times, conflicting ideas in its overflowing hat that it’s come to serve less a name for a coherent investment strategy than as a Rorschach test enabling both advocates and opponents to signal their political stances. In short, if you’re for it, I’d say the chances are pretty good that you voted for Kamala Harris — whether or not you happen to mean by ESG the same thing the next voter does.

Another part of the difficulty is that firms are increasingly moving away from explicit endorsement of ESG goals, maybe because of the coming change in administrations (those aforementioned Biden administration ERISA rules are likely dead on day one of Trump II) or maybe because more and more investors, presented with the aforementioned Rorschach, read E-S-G as meaning W-O-K-E. BlackRock, for instance — one of the Texas defendants — has lately rejected the term and, possibly, the strategy.

Most importantly, although the complaint painstakingly quotes Federal Trade Commission chair Lina Khan as sharing the plaintiffs’ concerns, I’m not sure the narrative hangs together.

Put aside recent evidence that as industries become more concentrated, output tends to go up, not down. The Texas lawsuit also omits something else: Whatever the public rhetoric of fund managers, demand for coal in the US has decreased sharply over the past decade, driven by, among other market forces, the relatively low price of natural gas. Coal industry jobs have been falling since World War II, many lost to increases in productivity. This can’t all be Big Finance collusion.

Well, fine. Like it or not, bringing high-profile lawsuits that never go anywhere is part of what state attorneys general with higher aspirations do.

True, one needn’t be part of the anti-ESG crowd to worry about the potential anti-competitive power of the increasing concentration of corporate control in a handful of institutional investors. If that problem exists, it’s hardly a wild idea that antitrust law is the proper testing ground.

Most of this concern, however, is related to the ability of shareholders who have stakes in competing corporations to raise prices in the industries they control and thereby benefit themselves. In the case of ESG investing, there’s little evidence for the proposition that those who do it are better off than those who don’t or that pro-ESG activists have spotted secret information not already incorporated into share prices.

The Texas lawsuit tries to answer this concern with such assertions as the claim that “BlackRock routinely violated its pledge” to its investors that “its non-ESG funds would be dedicated solely to enhancing shareholder value.” That is, in pursuit of ESG goals, the company has used non-ESG-earmarked money. Color me skeptical. The defendants attract some of the most sophisticated investors in the world, and they are not withdrawing their money in droves.

Pro- and anti-ESG regulations and lawsuits are two sides of the same odd coin: Both insist that the firms whose practices are being challenged are not acting simply for the benefit of their investors. In short, those who decide where to put the investors’ money are missing something important — and the plaintiffs are here to help.

The efficient capital markets hypothesis suggests otherwise, but let’s put that aside. What’s most striking about the claims of pro- and anti-ESG alike is that — mirabile dictu! — what the companies are overlooking just happens to coincide in precise detail with the political predilections of the critics.

Don’t get me wrong. Big Finance invests a lot of money, and it’s easy to see why activists and politicians want to direct where that money goes. But it’s not the activists’ money, and it’s not the politicians’ money. It’s the investors’ money — and, on current evidence, they’re happy with the returns they get.