The outcome of the antitrust case led by Texas against the trio of BlackRock, State Street, and Vanguard won’t just impact environmental, social, and governance investing. A recent academic paper has argued that while the crux of the federal case is about coal and the wider anti-ESG movement, it also poses a real existential threat to the very architecture of the industry.
Entitled “Texas v. BlackRock Puts the Common Ownership Theory on Trial, with Implications across the Financial Sector and Collaborative Sustainability Efforts,” the paper by Denise Hearn and Cynthia Hanawalt of Columbia University argues that the case brings the concept of common ownership before a judge for the first time. The long-running debate about common ownership asks whether large investors that own shares in several firms within one industry are incentivized to soften competition with throttling tactics such as price manipulation, stifling innovation, or limiting new entrants.
The November 2024 lawsuit from Texas attorney general Ken Paxton against the Big Three asset managers contended that they had been actively conspiring to manipulate energy markets in the state away from coal, and in doing so actively and intentionally drove up costs for consumers. The suit further alleged that, having acquired large stakes in the state’s public coal companies, the three were wielding their great influence to suppress the market, violating Section 7 of the Clayton Antitrust Act, which normally pertains to M&A.
The claim added that the firms also deceived investors that chose non-ESG funds by pursuing ESG strategies to the contrary. (The asset managers have said that the claims are without merit.)
Texas was joined in the case by ten other red states, including Missouri.
“Using their combined influence over the coal market, the investment cartel collectively announced in 2021 their commitment to weaponize their shares to pressure the coal companies to accommodate ‘green energy’ goals,” the Missouri attorney general’s office said in a press release. “To achieve this, the investment companies pushed to reduce coal output by more than half by 2030.”
BlackRock declined to comment for this article, but in a statement on the lawsuit in November, said, “BlackRock’s holdings in energy companies are regularly reviewed by federal and state regulators. We make these investments on behalf of our clients, and our focus is on delivering them financial returns. The suggestion that BlackRock has invested money in companies with the goal of harming those companies is baseless and defies common sense. This lawsuit undermines Texas’ pro-business reputation and discourages investments in the companies consumers rely on.”
On August 1, a federal judge in the Eastern District of Texas denied a motion to have the case dismissed, allowing the case to proceed.
Hearn and Hanawalt believe that the case is “factually and legally flawed,” but in the paper argue that even a loss for Texas could result in a sea change for the asset management industry that leads to changes in conduct.
Speaking to II, Hearn said that because Texas v. BlackRock is the first concrete legal case to address the antitrust risk of ESG, it finally puts wider arguments about common ownership in front of a court.
The case utilizes progressive scholarship that for ten years has been making the argument that index funds are anti-competitive and violate antitrust rules, she said. “But it uses those arguments in a surprising way, by claiming that the undue influence of the managers was driving the coal companies to restrict outputs and therefore raise prices for consumers.”
She added: “We think that the case is obviously factually and legally flawed for a number of reasons, but we do think that the outcome of the case will set a novel precedent, however they fall, because this is really the first case to adjudicate these dynamics.”
The court order rejecting the Big Three’s request for a dismissal asserted that the passive-investor safe harbor “is unavailable to investors who, as Defendants allegedly did, use their stock through proxy voting or otherwise to bring about or attempt to bring about the substantial lessening of competition.” This decision alone could forcibly change the way that asset managers operate when owning multiple companies within the same sector.
The Department of Justice and the Federal Trade Commission likewise addressed the limits of safe harbor protections in a joint statement of interest filed in May, which demonstrated their intent to be involved in the case. “Today’s statement of interest explains that while antitrust safe harbors for passive investment protect most index fund investing and beneficial corporate governance advocacy, they do not protect the use of commonly managed stock in competitors to encourage market-wide reductions in output,” it read. “The statement explains how the law protects typical shareholder behavior, how the States’ complaint alleges an anticompetitive campaign, and how the law should properly be applied to the States’ claims.”
A positive result for the plaintiffs could “upend the asset management industry as it is currently constituted,” said Hearn, with the potential to limit percentage stakes across rivals within industries or prohibit shareholders owning more than one company within an industry at a time.
In the paper, Hearn and Hanawalt position the case within the ongoing academic discussion on common ownership, where it has been argued that even without collusion, diversified owners could dull competition, simply because of the way that industry profits are aggregated within index funds.
“I don't think that the people who have pushed systemic stewardship have really thought that hard about it in terms of the antitrust risk beyond the Republican weaponization of this,” said Hearn. “There are some interesting antitrust and legal questions that this new approach brings up that we don't really know the answers to yet.”
State Street and Vanguard declined to comment.
