17 Democratic State Attorneys General defend ESG Investing

I've been writing recently about the significant ramp-up of political and intellectual debates on competition vs. collaboration for sustainability objectives.

Well, it seems the conversation has officially gained critical mass in the US: The New York Times wrote a piece – "When Does Collaboration Become Collusion?" – about the fashion industry; Matt Levine covered "anti-ESG antitrust" in his November 14 Money Stuff newsletter; and on Monday, 17 Democratic Attorneys General sent a letter to the Senate Banking, Housing, and Urban Affairs Committee and to the House Financial Services Committee, effectively clapping back at Republicans for declaring war on ESG investing.

The AG letter is fascinating in many ways, but for those catching up on this conversation, I'll do a re-cap before we get to it. And to help myself make sense of all this, I put together a Google slides deck which I'll summarize in this post. If you'd like to see the full deck, just reply to this email.

Two levels of conversation: Investors and Companies

Firstly, it's important to recognize that there are two levels of conversations happening:

1. At the investor level – with investors who are joining large coalitions (more of a US-specific problem because of anti-ESG backlash from Republicans)
2. At the competitor collaboration level – companies who are doing joint standard setting, investments, or various industry-wide collaborations who say antitrust is a barrier to them collaborating on sustainability goals (which has been a focus of conversation and regulatory reform for a few years already in Europe).

Today, we'll focus on the first of these two levels – the investor level.

Mark Carney's antitrust woes

The full force collision between ESG and antitrust occurred in recent months at GFANZ (the Glasgow Financial Alliance on Net Zero). Co-chaired by Mark Carney and Michael Bloomberg, GFANZ is an alliance of over 550 of the world's largest asset managers, banks, and other investment shops responsible for a collective $130 trillion in assets.

Originally, GFANZ members were required to commit to the UN Race to Zero protocols which became more stringent this year. The new requirements asked members to publish decarbonization transition plans, to stop financing new fossil fuel assets, and to commit to net zero targets among their portfolio companies. It included language asking members to "phase out development, financing and facilitation of new unabated fossil fuel assets, including coal, in line with science-based scenarios.” This didn't sit well with banks.

Now, Republicans have been hand-waving about Blackrock and other "woke capitalism" investor aims for a while. I am sympathetic to some of their critiques (with caveats, of course). But, for example, here's C. Boyden Gray – a D.C. lawyer and former U.S. Ambassador to the European Union – in a July 2020  WSJ article:

“When America’s financial industry starves the energy sector of capital, that isn’t fair, free-market competition. It’s a subsidized industry barrelling toward collusion at the invitation of radical third-party intermediaries—and inviting billions of dollars in antitrust liability.”

In March 2022, Mark Brnovich the Arizona State AG, said he was investigating ESG, saying that coordinated investor activism could be "the biggest antitrust violation in history." Then, Arkansas senator Tom Cotton wrote to BlackRock in July over its involvement in Climate Action 100+, arguing that its “anti-drilling coercion threatens our national security, hurts Americans struggling to buy a tank of gas, and appears to violate antitrust laws.”

So the chorus of Republican backlash against ESG investors was growing stronger by the month. When the UN Race to Zero requirements became more forceful, Republicans seized the opportunity to take aim at GFANZ (and other investor alliances like Climate Action 100+) claiming that these investor collaborations are akin to an industry boycott. The argument is that investors are making joint commitments to divest from fossil fuel industries like coal and “starving” oil and gas companies of capital, which is collusive and risks raising energy prices on consumers. A cartel colluding to restrict output or engage in market manipulation, especially when it raises consumer prices, is a classic antitrust violation. But is this the case here? More on that in a minute.

As the political pressure mounted, major banks started complaining and threatening to pull out of GFANZ due to legal risks and “fears” of breaching antitrust law. Nevermind that it is also very lucrative to continue financing fossil fuel industries. And, as I wrote previously, "a new study has found that just ten financial actors – a mix of investment advisors, governments, and sovereign wealth funds – stand in the way of slowing climate change. These ten financial firms own 49.5 percent of the emissions potential from the 200 largest fossil fuel firms. The top 5 were: BlackRock, Vanguard, the Government of India, State Street and the Kingdom of Saudi Arabia."

So while conservatives take aim at BlackRock, and other major asset managers for supposedly being too negative on oil, they are still one of the industry's largest financiers.

In late October, GFANZ dropped the UN Race to Zero partnership requirements, saying the partnership was encouraged but not mandatory.

How progressives are responding

All of this angered progressive groups wanting banks and asset owners to take their climate change mitigation strategies seriously. They felt financial institutions were using antitrust as an excuse to pull out of binding climate commitments that advocacy groups had fought hard to achieve.

The tactic of progressives, so far, has been to counter the Republican charges with the business case for ESG, arguing that climate and other social and governance considerations are not politically motivated, but financially material to investors. ESG is an extension of fiduciary duty for investors, they argue. This is the line of reasoning that the Democratic state AGs took this week in their letter, arguing that ESG isn't some politically-motivated or values-driven exercise, it is a source of better information and a form of risk-management for investors:

"A rigorous consideration of ESG factors to evaluate Value—the risk and reward of a potential investment—not Values—a subjective preference as to whether a given business or entity merits investment based on the nature of its business—can provide significant financial benefits to investors." – Democratic AG letter from November 21, 2022

I understand the desire to frame it this way, and I think there is some merit to emphasizing the informational and risk-mitigation components of ESG investing. The promise of ESG is not in its specific products, but in the set of questions it poses about the interconnected nature of economic, planetary, and social systems. As D.C. Attorney General Racine stated, "Thoroughly considering all potential risks before making investment decisions is a fundamental principle of capitalism. These anti-ESG efforts are akin to putting a blindfold on investors.”

However, the reality is that we can't disentangle economic value and values, no matter how hard we try. All economic 'value' is based on perceptual, values-based assessments of the world – something Mariana Mazzucato expertly dissects in The Value of Everything. I find the binary distinction that progressives are trying to draw between value (apparently an objective, rational economic measure) vs. values (inherently subjective) fascinating and flawed. I'm not sure it's going to work out, either.

How does this end?

Ultimately, there is a lot of uncertainty about how these antitrust violation claims would work out in court. There is little relevant case law regarding investor collaborations, and there has never been a horizontal shareholding or common ownership case brought. Horizontal shareholding, which is illegal under the Clayton Act, is when investors own shares in multiple competitors within one industry and use their leverage in anti-competitive ways. This could be one angle that Republicans take, but it's not totally clear this is how they're framing it either.

The AG letter does reference one case, Consol. Metal Prod., Inc. v. Am. Petroleum Inst., 846 F.2d 284, 292 (5th Cir. 1988) citing a passage that “a trade association that evaluates products and issues opinions, without constraining others to follow its recommendations, does not per se violate section 1 when, for whatever reason, it fails to evaluate a product favorably to the manufacturer."

Effectively they argue that investor associations that provide recommendations don't violate antitrust law. However, in the case of GFANZ, if the commitments to divest from fossil fuel financing are binding, that could be a violation which is, in part, why they made the commitments non-binding.

Some relevant questions moving forward are:
•   Do the GFANZ members collectively control a monopoly share (historically around 60% of the relevant market) of capital?
•   Are investors selling capital or buying stock? This could influence thresholds of market share definition around monopoly share (selling) or monopsony power (buying). Monopsony cases usually require much lower market share to bring a case.
•   How do we define the relevant market and calculate market share? These questions are notoriously difficult to do, and these pedantic debates can take years to work through in courts and are often where cases get held up.

I'll continue researching and monitoring developments here – feel free to send relevant info my way.

To my American readers, I hope you enjoy the holiday weekend.