On November 27, 2024, eleven state attorneys general, led by Texas Attorney General Ken Paxton, filed a lawsuit against three of the world’s largest institutional investors—BlackRock, State Street, and Vanguard—alleging that they used their substantial stockholdings in coal companies to artificially reduce coal output and achieve sustainable energy goals. This suit is noteworthy not only because it is apparently the first direct challenge to horizontal shareholding, but also because it makes good on Republican elected officials’ warnings that Environment, Social, and Governance (“ESG”) initiatives could expose businesses to antitrust liability.
The institutional investors are horizontal shareholders, or common owners, because they own minority stakes in multiple coal companies that horizontally compete with one another.[1] Collectively, as of June 30, 2024, the investors owned between 8% and 34.5% of nine coal companies that are responsible for almost half of the nation’s coal production.[2] According to the states’ complaint, “America’s coal producers have been responding not to the price signals of the free market,” but to commands issued by the three institutional investors.[3]
In 2021, the institutional investors joined the Net Zero Asset Managers Initiative and publicly committed, among other climate goals, to achieve net zero emissions by no later than 2050.[4] BlackRock and State Street also signed on to Climate Action 100+, an investor-led initiative with similar goals.[5] The initiative called for investors to “implement a clear escalation and voting policy” to influence the decisions of the assets they managed.
According to the states, these actions violate federal and state antitrust law by artificially reducing coal production and increasing energy prices for American consumers.[6] Specifically, they argue that institutional investors violated Section 7 of the Clayton Act by using their shares “to pressure the major coal producers to reduce production of coal”[7] and violated Section 1 of the Sherman Act by forming an output-reduction syndicate that yielded supra-competitive profits. The states cite “[d]efendants’ open participation” in the above climate initiatives as “substantial evidence of a horizontal agreement.”[8] The question this theory raises is whether “open participation” is sufficient to state (and prove) antitrust claims—particularly against minority investors—without more elaborate allegations that such “open participation” influenced marketplace conduct or that the institutional investors otherwise facilitated conspiratorial conduct.
This lawsuit comes as antitrust scholars and practitioners have increasingly focused on the viability of horizontal shareholding cases. Scholars and practitioners alike have noted that horizontal shareholding theory is supported by current antitrust precedent.[9] Such cases are novel only insofar as they combine two otherwise well‑established antitrust principles: (1) “partial acquisitions may have a substantial anticompetitive effect” and (2) “an investor’s ownership interest in rivals can raise competition concerns.”[10] Additionally, recent economic research provides empirical evidence that horizontal shareholding can reduce competition.[11]
Put differently, many antitrust professionals have agreed that horizontal shareholder cases are both legally and empirically supportable with the right facts—someone just needed to file a case. The states fighting ESG initiatives seized on horizontal shareholding as an opportunity to expand their campaign.
The states’ case was clearly fueled by intensifying challenges to ESG initiatives. Two years ago, a group of five Republican Senators sent pointed letters to dozens of law firms regarding the rise of ESG efforts. The Senators indicated that businesses “would be wise to lawyer up before undertaking ESG initiatives” and suggested such endeavors may constitute “climate cartels” or “ill-advised ESG schemes” that violate federal antitrust laws.
ESG refers to metrics used to assess an organization’s environmental and social impact, and how well that organization is governed. The notion that corporate responsibility extends beyond mere profitability is not new, but the Republican Senators’ 2022 letter is part of a recent strategy that construes ESG initiatives as schemes to “weaponize corporations to reshape society in ways that Americans would never endorse at the ballot box.” This summer, the House Judiciary Committee followed up by issuing an interim staff report “detail[ing] new direct evidence of a ‘climate cartel’ consisting of left-wing activists and major financial institutions that collude to impose radical [ESG] goals on American companies.” Just over a month later, the committee sent letters to over 130 companies that were members of Climate Action 100+.[12]
With this context, the states’ case against BlackRock, State Street, and Vanguard is a foreseeable implementation of the strategy Senate Republicans signaled two years ago. That said, this enforcement activity raises the fundamental question of whether antitrust policy is being driven by an anti-climate change agenda, or whether the environmental agenda is truly being used improperly to facilitate collusive outcomes.
Some defenders of ESG initiatives have responded that efforts to limit ESG investing are anti-capitalist. Senator Sheldon Whitehouse, for example, contends that ESG efforts reflect market demand. Asset owners “are clamoring for responsible investment options” because they have recognized that “[c]limate change poses unambiguous risks to the financial system.” BlackRock has put it more succinctly: “Climate risk is investment risk.”
There are good reasons to expect more cases using antitrust law to challenge ESG initiatives. For one, Republicans will control the Senate and House and can use this power to compel continuing investigations of the competitive impact of ESG initiatives. Additionally, President-Elect Donald Trump showed some appetite for such investigations during his last term. In 2019, the Department of Justice opened an antitrust investigation into four automakers who agreed to meet tougher emission standards set by a California state agency. That probe was dropped in early 2020, but it signals that President Trump may be open to using antitrust law to curb ESG initiatives.
What is less clear is whether the states will succeed in this case. The states will face the same hurdles that antitrust plaintiffs often face at the motion to dismiss stage—like adequately pleading the existence of an agreement and absence of a plausible economic motive. These obstacles will likely be compounded by challenges associated with alleged collusion via horizontal shareholding, particularly when the facts involve investors with only minority interests in the acquired companies.[13] Courts may require additional allegations that the investors influenced corporate strategies when the allegations involve minority investors.
It is also unclear how future ESG cases will be pleaded. Whether plaintiffs will adopt a horizontal shareholder theory or a more well-accepted theory of anticompetitive conduct may turn on whether they believe asset managers to be more villainous defendants than the companies whose stock they own. Additionally, while these challenges have largely focused on the “E” in ESG, time will tell whether parties bring antitrust actions to challenge a range of other ESG initiatives, such as those concerning labor policies or racial justice.
[1] Compl. at ¶¶ 57, 109, 113-114
[2] Id. at ¶¶ 4, 20
[3] Id. at ¶ 1
[4] Id. at ¶ 115. Vanguard subsequently announced its withdrawal from NZAM on December 7, 2022.
[5] Compl. at ¶ 116
[6] Id. at ¶¶ 3-6.
[7] Id. at ¶ 5.
[8] Id. at ¶¶ 6, 116
[9] Fiona Scott Morton & Herbert Hovenkamp, Horizontal Shareholding and Antitrust Policy, Yale Law Journal, vol. 127, no. 7 at 2033-36 (2018). Nevertheless, some scholars contend that mere common ownership without an illicit agreement violates neither Clayton Act Section 7 nor Sherman Act Section 1. Thomas A. Lambert, Mere Common Ownership and the Antitrust Laws, University of Missouri School of Law Legal Studies Research Paper No. 2020‑09.
[10] Wyatt Fore, Common Ownership in the Draft Merger Guidelines: A Sea Change for Index Funds? (Oct. 2, 2023).
[11] Einer Elhauge, How Horizontal Shareholding Harms Our Economy—and Why Antitrust Law Can Fix it, Harvard Law School Forum on Corporate Governance (2020); Einer Elhauge, The Causal Mechanisms of Horizontal Shareholding, Ohio State Law Journal, vol. 82, no. 1 (2021).
[12] Notably, the letter states that BlackRock and State Street had recently withdrawn from Climate Action 100+.
[13] Battle Over ESG Investment Standards Intensifies, Cohen & Gresser (Dec. 5, 2024).
