On November 27, 2024, a group of eleven state attorneys general (the “AGs”) sued three of the world’s largest asset managers (the “Asset Managers”), accusing them of anticompetitive stock acquisitions, deceptive asset management practices, and an antitrust conspiracy to restrict coal output. The states seek declaratory and injunctive relief including divestitures, as well as fines under state laws, although the allegations could provide a basis for follow-on private treble damages claims under the antitrust laws.
The AGs’ antitrust and consumer protection suit follows a series of cease-and-desist letters and demands for information by many state attorneys general including the plaintiffs here, as well as a lengthy congressional investigation accusing sustainability-focused investors and climate activists of forming a “climate cartel.” That investigation produced an extensive House Judiciary Committee Report compiling internal material regarding activities by sustainability-focused investment groups and their members, which the minority “Counterreport” alleged had been subpoenaed and published specifically to enable like-minded state law enforcers to bring suit.
While this client alert focuses on the details of the litigation against these Asset Managers, there are practical steps that all companies should take when considering sustainability-focused collaborations, standards, or goals. We discuss some of them below, as well as in a recent client alert and a ABA Section of Environment, Energy, and Resources’ Trends article.
Link to The Lawsuit’s Allegations The Lawsuit’s Allegations
The lawsuit asserts three sets of claims.
First, it alleges that the Asset Managers’ acquisitions of significant minority shareholdings in competing coal companies have substantially lessened competition under Section 7 of the Clayton Act, focusing on alleged relevant markets for thermal coal and for coal mined in the South Powder River Basin. This claim relies primarily on the following allegations:
- That the Asset Managers use their significant shareholdings, rights, and status as the largest or among the largest shareholders to influence the management of nine coal companies;
- That the arrangement amounts to “effective[] … common control” of these competitors;
- That relevant markets for coal production are concentrated;
- That other producers lack the ability to expand, in part due to associated efforts to dissuade coal investments; and
- That the Asset Managers have used direct engagement and the exercise of shareholder rights to cause the companies to reduce output and compete less effectively.
The claim’s effects-based “horizontal” or “common” ownership theories (see Guideline 11 of the 2023 Merger Guidelines) and its market structure claims typical of merger challenges (such as measures of concentration) are thus linked by substantive allegations that the Asset Managers have caused managers to pursue particular policies restricting output.
Second, the lawsuit alleges that the Asset Managers formed a conspiracy in 2021 to restrict coal output, and to share competitively-sensitive information with the same effect, in violation of Section 1 of the Sherman Act and state antitrust laws. This set of claims relies primarily on the following allegations:
- That because coal-related emissions cannot be reduced except by reducing coal output, commitments and activities seeking to reduce coal-related emissions are forms of output reduction;
- That, by joining and making commitments to groups advocating net zero goals, the Asset Managers “announced their common commitment to [a] scheme” of output reduction;
- That the statements of net zero groups the Asset Managers joined and participated in made clear that coal output reduction was necessary to meet net zero commitments; and
- That that Asset Managers pursued engagement and shareholder activism to influence portfolio companies to disclose climate-related risks and adopt emissions targets or strategies consistent with a net zero transition, which the Complaint characterizes as commitments to output reduction and means of monitoring compliance.
Allegations supporting the claim closely link emissions reduction with output reduction, third-party statements and actions with those of the Asset Managers, disclosures of risk with commitments to reduce output, and statements regarding others’ activities with alleged conduct.
Third, the lawsuit alleges that one of the Asset Managers deceived its own investors in violation of Texas state law on deceptive trade practices by representing that its “non-ESG” funds would not pursue an ESG-related investment strategy. It alleges that the Asset Manager’s activities involving these “non-ESG” funds would constitute what a reasonable investor would consider an ESG investment strategy, including:
- Using its entire investment portfolio as leverage in its shareholder activism;
- Making climate-related commitments and adopting emissions targets applicable to its portfolio as a whole;
- Adopting an overall business strategy that pursues sustainability-focused investment strategies and priorities; and
- Using its proxy votes generally to advance ESG goals.
The AGs allege that the Asset Managers’ activities have caused significant decreases in coal output and significant increases in coal prices over 2019-2022, and that other forces such as ordinary supply and demand, the COVID-19 pandemic, and the war in Ukraine do not fully explain these shifts in output and price.
Link to Implications for ESG Activities Implications for ESG Activities
The ESG activities of the Asset Managers and the climate groups directly referenced in the Complaint have been a focus of investigation and potential suit by Republican Congressional representatives and Republican state attorneys general for several years. In addition, Republican state attorneys general sued in 2023 to block U.S. Department of Labor rules governing retirement plan managers’ consideration of climate change and ESG factors, and the Tennessee attorney general asserted a similar state law consumer protection claim against one of the Asset Managers a year ago. A major antitrust and consumer protection lawsuit against these Asset Managers for their ESG activities was an anticipated next step, and further enforcement around other firms’ ESG activities by Republican state and federal officials, potentially jointly, is a significant possibility.
Two important issues distinguish the allegations of the present lawsuit from risks related to other ESG activities.
First, the theory of an ESG conspiracy to restrict output as advanced here is not as readily applicable outside the context of shareholders exercising effective control over firms. In essence, this presents a somewhat traditional theory by which shareholders are the ringleaders of a conspiracy among the companies they own. While hub-and-spoke theories of a similar conspiracy are possible without effective control, they raise additional complexities creating factual burdens for a plaintiff and defenses for a defendant. Asset managers, influential investors, and shareholder activists should take particular note of this case and its treatment of legal theories including effective control, horizontal or common ownership, and treating demands for risk disclosure as commitments to engage in particular conduct.
By contrast, the case does not concern the more far-reaching antitrust theory that many ESG activities may constitute a “group boycott.” That theory, advanced in the Judiciary Committee Report, would raise significant risks for firms whose ESG commitments cause them to withdraw or refrain from business relationships, but under existing precedent it would require specific facts suggesting the “boycotting” firms stand to benefit financially from a reduction in competition.
Second, on its face, the lawsuit’s theory that emissions reduction is output reduction is specific to coal, based on the allegation that coal-related emissions cannot be otherwise abated. Whether this theory will be accepted even in that context is far from certain, but its acceptance there could have farther-reaching consequences, as opponents of ESG activities may seek to leverage it as more widely-applicable precedent that all emissions-reduction activities are forms of output reduction.
Most generally, the present lawsuit illustrates that even well-intentioned ESG activities, particularly those involving coordination among independent parties, can raise antitrust risks that should be carefully managed. A commitment to climate-related goals is not, in itself, an antitrust violation, but because ESG backlash antitrust theories have a significant partisan dimension, the risk of enforcement in some form is likely to increase in the current political climate. For this reason, ESG commitments and cooperative efforts should be subject to antitrust compliance review to mitigate risks.