The Republicans declare war on multibillion-dollar Wall Street giants

Even before Donald Trump has returned to the White House and the Republicans take control of Congress, the war on “woke capitalism” in the US is intensifying.

Late last week, Texas and 10 other Republican-led states sued BlackRock, State Street and Vanguard, claiming they had breached antitrust laws by conspiring to boost electricity prices by curtailing coal supplies.

Larry Fink’s BlackRock argues that the suggestion it invested in companies with the goal of harming them was baseless and defied common sense.Credit: Bloomberg

The companies did this, the lawsuit alleges, by pressuring coal companies to cut their output, causing consumers in Texas and the other states to pay higher power bills in pursuit of a “destructive, politicised, environmental agenda”.

Texas Attorney-General Ken Paxton said his state would not “tolerate the illegal weaponisation of the financial industry”.

Texas has been one of the most aggressive Republican states, railing against “woke” capitalism or investors who consider environmental, social, and governance (ESG) and diversity, equity, and inclusion (DEI) issues when they invest.

The waging of the culture wars in states such as Texas and Florida has seen the politicisation of ESG and DEI elevated over financial common sense.

In 2021, Texas banned a number of the major Wall Street banks from underwriting state and municipal bond issues.

The withdrawal of the major banks forced the issuers to negotiate bond sales rather than conduct auctions, with the smaller pool of underwriters and the loss of a more competitive process. The Texas Chamber of Commerce this year estimated the move had cost the state about $US270 million ($416 million) a year in extra interest costs.

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

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

The world’s biggest fund manager was once the most vocal advocate for ESG investing but has backed away from promoting it recently, with its chairman, billionaire Larry Fink, saying that while his firm hadn’t changed its stance, ESG had become too politicised. BlackRock had to double its spending on Fink’s security because of his profile on socially responsible investing.

BlackRock, Vanguard and State Street are mainly index investors, with their shareholdings dictated by companies’ weightings in sharemarket indices. As a group, they do tend to have big positions in companies in the main indices, although that doesn’t mean that they act in concert.

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

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

The thrust of the lawsuit brought by the Republican states is that, by promoting decarbonisation, they encouraged the coal companies they are invested in to reduce their production, driving up prices for consumers – and the coal companies’ profits.

To support the allegation of a conspiracy, the lawsuit referred 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 quit Climate Action 100+ this year. Vanguard, which left Net Zero Asset Managers two years ago, was never a member of Climate Action 100+.

It is also worth noting that BlackRock’s support for shareholder proposals on ESG issues has fallen steadily and significantly over the past three years. Whether that was because of the external pressures or, as BlackRock has said, because more recent proposals were too prescriptive or lacking in economic merit is something only BlackRock would know.

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

Texas attorney-general Ken Paxton says his state won’t “tolerate the illegal weaponisation of the financial industry”.Credit: Bloomberg

In effect, the suit alleges that the three fund managers were acting in concert to use their combined shareholdings in coal companies to drive down output and drive up coal prices. It’s not arguing that they harmed the companies they were invested in but that, in the process of generating higher margins and making the companies more profitable by constraining supply, harmed consumers.

Coal prices, globally, did spike after Russia invaded Ukraine in 2022 but, with China’s economy slowing significantly since then, have fallen back significantly.

It is more likely that the coal price fluctuations 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.

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

More than half the companies in the S&P 500 index have adopted net zero emissions targets and more than 90 per cent of them produce ESG reports, albeit that some have been accused of “greenwashing”, or claiming they comply with ESG standards when they don’t. (The same accusation has been levelled at some ESG fund managers.)

The big fund managers operate globally, and in some key jurisdictions – Europe, for instance, or the big pool of savings in Australasia – there’s a far greater commitment and, in some instances, a legal obligation to consider ESG considerations.

Companies and their shareholders, including index funds, also risk losing their social licences to operate if they don’t meet community expectations regarding environmental, social, or governance issues.

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

The waging of the culture wars in states like Texas and Florida has seen the politicisation of ESG and DEI elevated over financial common sense.

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

That was designed to undo a rule issued by the US Labor Department in 2022 that allowed those with fiduciary responsibilities to consider climate change and other ESG factors in their investment decision-making for private pension plans. That was a reversal of a decision made by the Trump administration in 2020. Joe Biden vetoed the Republicans’ bill.

With the return of Donald Trump and Republican control of both chambers of Congress, the culture wars that have raged in America and which American conservatives believe were a significant factor in their electoral success are likely to produce more attempts to legislate and litigate against “woke” capitalism.

Whether it is the big fund managers or companies that operate internationally, the trend is going to produce some awkward and potentially dangerous moments because of the different demands within the different jurisdictions and the potential for a clash between their own investment convictions and those of Republican lawmakers.

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