Texas also banned fund managers offering ESG products, including BlackRock, Vanguard and State Street, denying state pension funds access to the world’s largest investors. Florida and other Republican-dominated states have adopted similar policies.


BlackRock responded to the lawsuit by saying that the suggestion that it had invested in companies with the aim of harming them was baseless and contrary to common sense.


The world’s largest fund manager was once the most outspoken advocate for ESG investing but has recently pulled back from promoting it, with chairman, billionaire Larry Fink, saying that while ESG had not changed its position, it had become too politicized. BlackRock had to double its spending on Fink’s security because of his socially responsible investing profile.


BlackRock, Vanguard and State Street are primarily index investors, with their stock holdings determined by the weightings of companies in stock indexes. As a group, they typically have large positions in companies in the major indices, but that doesn’t mean they act in concert.




They are largely passive rather than active investors. But at least in some of their funds they screen for ESG compliance and promote decarbonization in their interactions with the companies they invest in.


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They would argue that there is evidence that companies with strong ESG credentials outperform others and that their positions on ESG issues are consistent with their obligation to their clients to maximize long-term returns.


The gist of the lawsuit filed by Republican states is that by promoting decarbonization, they have encouraged the coal companies in which they have invested to reduce production, driving down prices for consumers – and the profits of the coal companies – have gone up.


To support the conspiracy allegation, the lawsuit pointed to the three fund managers’ involvement in climate change groups such as Climate Action 100+ and Net Zero Asset Managers, although both State Street and BlackRock left Climate Action 100+ this year. Vanguard, which left Net Zero Asset Managers two years ago, was never a member of Climate Action 100+.




It’s also worth noting that BlackRock’s support for shareholder proposals on ESG issues has steadily and significantly declined over the past three years. Whether that was because of outside pressure or, as BlackRock has said, because more recent proposals were too prescriptive or lacked economic value, only BlackRock knows.


The threat within the lawsuit lies in the use of antitrust law.



Texas Attorney General Ken Paxton says his state “will not tolerate the illegal weaponization of the financial sector.”

Texas Attorney General Ken Paxton says his state “will not tolerate the illegal weaponization of the financial sector.”Credit: Bloomberg



In fact, the lawsuit alleges that the three fund managers acted in concert to use their combined stock holdings in coal companies to cut production and drive up coal prices. It is not alleged that they have harmed the companies they have invested in, but that consumers have been harmed in the process of generating higher margins and making the companies more profitable by restricting supply.


Coal prices rose globally after Russia invaded Ukraine in 2022, but have fallen back significantly as the Chinese economy has slowed significantly since then.




It is more likely that the fluctuations in coal prices had more to do with the global supply and demand picture than with any concerted coercion of coal companies by three fund managers to impose their views on climate change.


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It’s also true that many major companies – even fossil fuel companies – are themselves committed to reducing their carbon emissions.


More than half of the companies in the S&P 500 index have adopted net-zero emissions targets and more than 90 percent of them produce ESG reports, even though some have been accused of ‘greenwashing’ or claim they are meeting ESG standards to comply if they do not. T. (The same accusation has been made against some ESG fund managers.)


The major fund managers operate globally, and in some key jurisdictions – Europe for example, or the big money box in Australia – there is a much greater commitment and, in some cases, a legal obligation to consider ESG considerations.




Companies and their shareholders, including index funds, also risk losing their social licenses to operate if they fail to meet community expectations on environmental, social or governance issues.


Republicans may not like it, but if shareholders and many companies believe that ESG issues are important to them, whether for ethical considerations or commercial pragmatism, then fund managers have no choice but to take these issues into account when investing in other people’s money. .



Waging the culture wars in states like Texas and Florida has made the politicization of ESG and DEI more important than financial common sense.



Republicans in Congress tried to pass legislation last year to prevent fund managers from considering ESG issues when investing.


That was intended to undo a rule issued by the U.S. Department of Labor in 2022 that allowed people with fiduciary responsibilities to consider climate change and other ESG factors in their investment decisions for private retirement plans. That was a reversal of a decision the Trump administration made in 2020. Joe Biden vetoed the Republicans’ bill.




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With the return of Donald Trump and Republican control of both chambers of Congress, the culture wars that have raged in America and that American conservatives believe were a major factor in their electoral success are likely to lead to more attempts to legislate and to take legal action against ‘woke’. capitalism.


Whether it’s the big fund managers or companies operating internationally, the trend will present some awkward and potentially dangerous moments due to the different requirements within different jurisdictions and the potential for a clash between their own investment beliefs and those of Republican lawmakers. .


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