The world’s largest asset management firms are being accused of “illegal weaponisation” of their investments in fossil fuel companies, as the backlash against environmental, social and governance (ESG) intensifies.
A lawsuit, brought last week by the state of Texas, backed by ten other states, alleges that BlackRock, State Street and Vanguard, collectively managing more than $26 trillion, exploited their market power.
They are accused of conspiring with climate advocacy groups to pressure coal companies to reduce their output and meet carbon emissions reduction targets, driving up consumers’ utility bills in the process.
“Texas will not tolerate the illegal weaponisation of the financial industry in service of a destructive, politicised environmental agenda,” said Texas attorney general Ken Paxton in the lawsuit.
“Competitive markets – not the dictates of far-flung asset managers – should determine the price Americans pay for electricity,” said the complaint.
The alleged collusion refers to Blackrock, Vanguard and State Street utilising the Climate Action 100 and the Net Zero Asset Managers Initiative to signal their mutual intent to reduce the output of thermal coal.
In a statement, BlackRock said any suggestion its investments in coal producers were intended to negatively impact them was “baseless and defies common sense”.
State Street also said on Friday the lawsuit is “baseless” and that it invests “with a focus on enhancing shareholder value”.
Edward Foo,
Pacific Harbor
UNFORTUNATE DISTRACTION
Commenting on these anti-ESG legal moves, Edward Foo, managing director of Asian alternative asset management firm Pacific Harbor Group, told AsianInvestor he thinks it’s “frankly a sad state”.
Foo called the lawsuit an unfortunate distraction from the real work that needs to be done on ESG.
“It’s diverting resources away from the teams who have dedicated their professional career to studying and finding answers to the problems that threaten our civilisation, from an ecological and climate perspective.”
The other 10 states backing the Texas lawsuit include Alabama, Arkansas, Indiana, Iowa, Kansas, Missouri, Montana, Nebraska, West Virginia and Wyoming.
Vanguard actually left the Net Zero initiative in 2022, while BlackRock and State Street left Climate Action 100+ in February this year, citing concerns about just such legal action as this.
Their withdrawal followed the announcement by Climate Action 100+ of a shift from pressurising companies to improve climate-related disclosures, to actively pressurising them to reduce their emissions.
Also read: The war on ‘woke’: will the anti-ESG wave in the US reach Asia?
“In our judgment, making this new commitment across our assets under management would raise legal considerations, particularly in the US,” BlackRock said in a media release at the time.
State Street Global Advisors also stated the change in focus was not consistent with their independent approach to proxy voting and portfolio company engagement.
But the Texas lawsuit said the withdrawals did not negate the “ongoing and future threat” of continued pressure. It seeks to block the defendants from using their investments to vote on shareholder resolutions and take other steps that could undermine coal output and limit market competition.
It also seeks civil fines for violating federal antitrust and consumer protection laws.
The lawsuit also charges the three asset managers with deceiving “thousands of investors who elected to invest in non-ESG funds to maximise their profits. These funds pursued ESG strategies notwithstanding the defendants’ representations to the contrary.”
“The main issue here is that the AG alleges they operated outside the mandate of investors, and that’s a big SEC regulatory issue,” Foo told AsianInvestor.
“For 10 other states to join indicates that the AG has something that sticks.”
ANTI-ESG BANDWAGON
A further indication of the headwinds facing ESG activism is the increasing prominence of anti-ESG fund groups such as Strive Asset Management.
Strive was co-founded by Vivek Ramaswamy, who was recently appointed to lead the next Trump administration’s Department of Government Efficiency (DOGE) alongside Elon Musk. The firm is ramping up its marketing drive in the US, recently sealing distribution ties with the Fidelity Investments and Charles Schwab investor platforms.
Unlike traditional funds that may consider environmental impact or workplace diversity in their investment decisions, Strive’s funds vote against ESG proposals at shareholder meetings, prioritising what it calls shareholder capitalism over stakeholder interest.
“Strive’s Direct Indexing includes full proxy voting coverage and corporate engagement from our in-house corporate governance team without regard to ESG or DEI constraints,” said the company’s statement on the new tie-ups.
Ramaswamy, a biotech entrepreneur, believes that the purpose of a for-profit company is to maximise long-term value for its shareholders, and that too many asset managers have shifted away from that shareholder priority, using their investors’ capital to advance ESG interests.
The fear is that the anti-ESG moves will only galvanise the climate sceptics. “And that’s a very dangerous state to be in. What we really don’t need is division and for camps to emerge saying climate change is total BS,” said Foo.
He believes it would be tough for the fund groups to fight against the ESG backlash within the current governance structures.
“It might just be better to operate outside that structure by setting up an alternative path forward. That means avoiding those who are involved in ESG, where ESG is only a means to gain management fees, consulting fees or pure profits,” said Foo.
“An alternative path is to engage an entirely different segment of the population based on material facts and not narratives spun for public consumption. It would involve the engagement of specialist and interdisciplinary trained individuals – millennials and GenX-ers – who aren’t old enough to have been entirely screwed by the system and who have the ability to create value.”
“Solutions to these big environmental questions won’t necessarily break the bank, but the existing investing system doesn’t seek to engage, because it does not make them money. A good example is permaculture, which isn’t a solution that will cost billions to implement,” he added.
¬ Haymarket Media Limited. All rights reserved.
