On November 27th, Texas and 10 other Republican states sued the three largest American index fund managers - BlackRock, Vanguard, and State Street - alleging that the firms have conspired to restrict the supply of coal to drive up its price as part of their efforts to meet net-zero goals. This latest legal battle, which conservatives describe as a war against “Woke Capitalism”, raises questions: does the lawsuit have substance, and what implications does it hold for how the world’s largest firms pursue their ESG objectives?
Ken Paxton, the Attorney General of Texas and leader of the lawsuit, claims the three firms have “formed a cartel to rig the coal market.” His argument rests on the fact that the firms collectively own over 30% of shares in Peabody Energy and Arch Resources, two companies responsible for 17% and 13% of US coal production, respectively. According to Paxton, the fund managers have used their significant holdings to pressure these coal producers to reduce output, causing coal prices to “skyrocket.” Predictably, the three firms deny these claims, with BlackRock stating that it looks forward to “presenting the facts through the legal process” should the case move to federal court.
Source: Statista (2024); 2012-2025 Coal Prices
Interestingly, earlier in 2024, the Texas Permanent School Fund - which manages approximately $53 billion in assets - divested $8 billion from BlackRock. Texas officials justified the move by stating that “companies pushing anti-Texas policies and woke indoctrination have no place in Texas public education,” referencing BlackRock’s stance on boycotting fossil fuels and energy companies. While it remains unclear whether this divestment contributed to any restriction in coal output, it may have further incentivised BlackRock to take such actions. However, there is less clarity on how Vanguard and State Street would have become involved.
The lawsuit, therefore, cannot be dismissed outright as a mere political reaction to “woke” corporations. If further evidence emerges supporting claims of deliberate market manipulation, the three index fund managers could face serious consequences.
So, what does this mean?
This lawsuit underscores growing concerns about a so-called “climate cartel” and “collusion on decarbonisation”, a new niche within ESG discussions. These concerns were further amplified when a House Judiciary Committee report accused CA100+ members (including the three fund managers) of similar behaviour. The case highlights that firms- particularly the largest ones with significant environmental impact - are sometimes exploring or exploiting alternative methods to appear as though they are meeting sustainability goals, without making genuine, substantive changes.
While the lawsuit is unlikely to succeed - at worst, the fund managers may face little more than a “slap on the wrist” - it raises broader concerns. Are companies that claim to pursue net-zero and sustainability objectives manipulating markets, colluding, or engaging in superficial efforts to bolster their ESG credentials?
For ESG investors, this is particularly troubling. The case exposes a potential risk: firms that appear sustainable and earn high ESG scores may not be as environmentally friendly as they claim. Moving forward, investors must conduct thorough research into how companies achieve their ESG scores and remain vigilant regarding news and developments in relevant markets. This will help ensure that investments intended to support sustainability are not inadvertently backing firms engaged in unethical or questionable practices.
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