Lawsuit Against 'Woke Investing' Filed in Federal Court in Texas

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Sir Isaac Newton's Third Law of Motion holds that for each action, there is an equal and opposite reaction. That's certainly a useful maxim when parties in the White House change. President-elect Donald Trump has committed to undoing at least some of the work of his predecessor, Joe Biden, who himself devoted significant time and energy to reversing the work of the first Trump administration, which sought to roll back many of the achievements of his predecessor as president, Barack Obama.

None of that should be particularly surprising, given the sharply divergent views and political goals of recent presidents. Each seems to have been elected as an antidote to his predecessor. But Newton's Third Law is finding new currency in the investment field, where a legal reaction is pushing back against earlier actions made by institutional investors who pursued environmental, social and governance (ESG) goals.

On the day before Thanksgiving, 11 GOP-led states filed suit in the U.S. District Court for the Eastern District of Texas against three of the largest investment firms in the county, BlackRock Incorporated (NYSE:BLK) (New York, New York), Vanguard Group Incorporated (Valley Forge, Pennsylvania) and State Street Corporation, (NYSE:STT) (Boston, Massachusetts), alleging that they illegally conspired to manipulate coal markets, driving up costs for consumers. The suit was filed under the federal Clayton and Sherman antitrust acts enacted over a century ago. It also claimed standing under state antitrust laws in Texas, Montana and West Virginia.

The investment managers denied they sought to manipulate energy markets.

Texas Attorney General Ken Paxton is spearheading the lawsuit. In a November 27 statement from his office, he asserted that the three asset management firms have "acquired substantial stockholdings in every significant publicly held coal producer in the United States, thereby gaining them power to control the policies of the coal companies. 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 (coal mining companies) to reduce coal output by more than half by 2030."

"Texas will not tolerate the illegal weaponization of the financial industry in service of a destructive, politicized 'environmental' agenda. BlackRock, Vanguard and State Street formed a cartel to rig the coal market, artificially reduce the energy supply and raise prices," Paxton added. "Their conspiracy has harmed American energy production and hurt consumers. This is a stunning violation of State and federal law."

The lawsuit was joined by 10 other states led by Republicans, including Alabama, Arkansas, Indiana, Iowa, Kansas, Missouri, Montana, Nebraska, West Virginia and Wyoming.

The lawsuit began by claiming, "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. 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. Defendants have reaped the rewards of higher returns, higher fees, and higher profits, while American consumers have paid the price in higher utility bills and higher costs."

It asserted that, collectively, the three asset managers own more than 30% of outstanding shares in Peabody Energy Corporation (NYSE:BTU) (St. Louis, Missouri) and Arch Resources Incorporated (NYSE:ARCH) (St. Louis). Together, the two companies account for approximately 30% of U.S. coal production. The lawsuit alleged the firms are using the influence gained through the stock holdings to pressure coal companies to reduce output in alignment with the asset managers' net-zero goals.

The Texas-led lawsuit is not the first time GOP critics of ESG have sought relief in the courts. BlackRock is a common target. Mississippi filed a lawsuit naming BlackRock this year, and Tennessee filed its own suit against the asset manager in 2023. Both claimed that the firm, one of the largest asset managers in the world, was letting politics and ESG considerations color its investment decisions.

In the U.S. electricity market, coal use has declined sharply in recent decades as stricter environmental laws, the widespread availability of natural gas as a competing fuel and increased competitiveness of renewable energy has forced the closure of hundreds of coal-fired generating units in the U.S. and sharply reduced the amount of coal used to generate electricity.

Click on the images at right to see the declining use of coal to generate electricity in the U.S. and a chart showing the closure of coal-fired generating units power plants since 2010, with a projection to 2029.

In the 1980s, coal was used to generate about half of the electricity in the U.S. For 2024 and 2025, coal is expected to generate about 15% of the power used in homes and businesses, significantly less than natural gas (42% in 2024), renewables (23% in 2024) and nuclear (19% in 2024), according to the November "Short-Term Energy Outlook" published by U.S. Energy Information Administration (EIA).

However the lawsuit, filed in federal court in Tyler, Texas, about 100 miles southeast of Dallas, turns out, it is only the most recent reaction by Republicans who have campaigned against "woke" investing, ESG criteria and diversity, equity and inclusion (DEI) laws and regulations.

Former GOP presidential candidate Vivek Ramaswamy has been among the most prominent critics of "woke" investing, at least in the energy industry. For more on his campaign, see December 6, 2022, article - Fund Pushing Back on ESG in Oil Patch Finds Profits in Kindred Souls and August 12, 2022, article - Asset Manager Pushes Back on ESG Narrative. Ramaswamy now is co-leading the Department of Government Efficiency (DOGE) with Tesla Incorporated's (NASDAQ:TSLA) (Austin, Texas) Chief Executive Officer Elon Musk.

Some states have moved to stop doing business with investment firms they see as hostile to fossil fuels and unduly in the thrall of ESG.

The pushback against ESG likely will continue once the Trump administration takes office. The president-elect has vowed to eliminate federal tax credits for electric vehicles (EVs). Trump's nominee to head the Environmental Protection Agency (EPA), Lee Zeldin, voted against the Inflation Reduction Act (IRA) and several other environmental bills when he was a member of the House of Representatives.

On another front, on December 4 Trump nominated conservative lawyer Paul Atkins to chair the U.S. Securities and Exchange Commission (SEC). That agency drafted a rule compelling publicly traded companies to disclose their greenhouse gas emissions, but the draft rule was narrowed, approved, and then stayed in the face of sharp and broad criticism from corporate interests and GOP attorneys general. For more on that, see March 7, 2024, article - SEC Finalized a Narrowed Set of Greenhouse Gas Reporting Rules. The agency may withdraw the rule altogether in an Atkins-chaired SEC.

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