Texas Suit Alleging Anti-Coal ‘Cartel’ of Top Wall Street Firms Could Reshape ESG—and Wall Street Itself

Since 2022, Republican lawmakers in Congress and state attorneys general have sent letters to major banks, pension funds, asset managers, accounting firms, companies, nonprofits and business alliances, putting them on notice for potential antitrust violations and seeking information as part of the Republican pushback against “environmental, social and governance” efforts such as corporate climate commitments. 

“This caused a lot of turmoil and stress obviously across the whole ecosystem,” said Denise Hearn, a senior fellow at the Columbia Center on Sustainable Investment. “But everyone wondered, ‘OK, when are they actually going to drop a lawsuit?’”

That came in November, filed by Texas Attorney General Ken Paxton and 10 other Republican AGs, accusing three of the biggest asset managers on Wall Street—BlackRock, Vanguard and State Street—of running “an investment cartel” to depress the output of coal and boosting their revenues while pushing up energy costs for Americans. The Trump administration’s Department of Justice and Federal Trade Commission filed a supporting brief in May.

The overall pressure campaign aimed at what’s known as “ESG” is having an impact. 

“Over the past several months, through this [lawsuit] and other things, letters from elected officials, state and federal, there has been a chilling effect of what investors are saying,” said Steven Maze Rothstein, chief program officer of Ceres, a nonprofit that advocates for more sustainable business practices and was among the earliest letter recipients. Still, “investors understand that Mother Nature doesn’t know who’s elected governor, attorney general, president.”

Earlier this month, a U.S. District Court judge in Tyler, Texas, declined to dismiss the lawsuit against the three asset managers, though he did dismiss three of the 21 counts. The judge was not making a final decision in the case, only that there was enough evidence to go to trial. 

BlackRock said in a statement: “This case is not supported by the facts, and we will demonstrate that.” Vanguard said it will “vigorously defend against plaintiffs’ claims.” State Street called the lawsuit “baseless and without merit.”

The Texas attorney general’s office did not respond to requests for comment.

The three asset managers built substantial stakes in major U.S. coal producers, the suit alleges, and “announced their common commitment” to cut U.S. coal output by joining voluntary alliances to collaborate on climate issues, including the Net Zero Asset Managers Initiative and, in the case of two of the firms, the Climate Action 100+. (All of them later pulled out of the alliances.) 

The lawsuit alleges that the coal companies succumbed to the defendants’ collective influence, mining for less coal and disclosing more climate-related information. The suit claimed that resulted in “cartel-level revenues and profits” for the asset managers.

“You could say, ‘Well, if the coal companies were all colluding together to restrict output, then shouldn’t they also be violating antitrust?’” Hearn asked. But the attorneys general “are trying to say that it was at the behest of these concentrated index funds and the concentrated ownership.” 

Index funds, which are designed to mirror the returns of specific market indices, are the most common mode of passive investment—when investors park their money somewhere for long-term returns.

The case is being watched closely, not only by climate alliances and sustainability nonprofits, but by the financial sector at large. 

If the three asset managers ultimately win, it would turn down the heat on other climate alliances and vindicate those who pressured financial players to line up their business practices with the Paris agreement goals as well as national and local climate targets. The logic of those efforts: Companies in the financial sector have a big impact on climate change, for good or ill—and climate change has a big impact on those same companies.

If the red states instead win on all counts, that “could essentially totally reconstitute the industry as we understand it,” said Hearn, who has co-authored a paper on the lawsuit. At stake is how the U.S. does passive investing. 

The pro-free-market editorial board of The Wall Street Journal in June called the Texas-led lawsuit “misconceived,” its logic “strained” and its theories “bizarre.”

The case breaks ground on two fronts. It challenges collaboration between financial players on climate action. It also makes novel claims around “common ownership,” where a shareholder—in this case, an asset manager—holds stakes in competing firms within the same sector. 

“Regardless of how the chips fall in the case, those two things will absolutely be precedent-setting,” Hearn said.

Even though this is the first legal test of the theory that business climate alliances are anti-competitive, the question was asked in a study by Harvard Business School economists that came out in May. That study, which empirically examines 11 major climate alliances and 424 listed financial institutions over 10 years, turned up no evidence of traditional antitrust violations. The study was broad and did not look at particular allegations against specific firms.

“To the extent that there are valid legal arguments that can be made, they have to be tested,” said study co-author Peter Tufano, a Harvard Business School professor, noting that his research casts doubt on many of the allegations made by critics of these alliances.  

Financial firms that joined climate alliances were more likely to adopt emissions targets and climate-aligned management practices, cut their own emissions and engage in pro-climate lobbying, the study found. 

”The range of [legal] arguments that are made, and the passion with which they’re being advanced, suggests that these alliances must be doing something meaningful,” said Tufano, who was previously the dean of the Saïd Business School at the University of Oxford. 

Meanwhile, most of the world is moving the other way. 

According to a tally by CarbonCloud, a carbon emissions accounting platform that serves the food industry, at least 35 countries that make up more than half of the world’s gross domestic product now mandate climate-related disclosures of some kind. 

In the U.S., California, which on its own would be the world’s fourth-largest economy, will begin requiring big businesses to measure and report their direct and indirect emissions next year.

Ceres’ Rothstein notes that good data about companies is necessary for informed investment decisions. “Throughout the world,” he said, “there’s greater recognition and, to be honest, less debate about the importance of climate information.” Ceres is one of the founders of Climate Action 100+, which now counts more than 600 investor members around the world, including Europe, Asia and Australia. 

For companies that operate globally, the American political landscape is in sharp contrast with other major economies, Tufano said, creating “this whipsawed environment where if you get on a plane, a few hours later, you’re in a jurisdiction that’s saying exactly the opposite thing.” 

But even as companies and financial institutions publicly retreat from their climate commitments amid U.S. political pressure, in a phenomenon called “greenhushing,” their decisions remain driven by the bottom line. “Banks are going to do what they’re going to do, and they’re going to lend to the most profitable or to the most growth-oriented industries,” Hearn said, “and right now, that’s not the fossil fuel industry.”