The United States House Judiciary Committee has sent over 130 letters to institutional investors, demanding answers on their involvement with what it refers to as the “woke ESG cartel Climate Action 100+”. The letters probe the investors’ approach to environmental, social, and governance (ESG) investment strategies and scrutinise the activities of Climate Action 100+’s activities, which the Committee labels as “collusive”. Additionally, the Committee requests the investors retain all related documentation and expects responses by August 14.
The Committee is responsible for overseeing the administration of justice in federal courts, which includes antitrust matters. Its current composition is 24 Republicans and 18 Democrats, indicating the potential for partisan perspectives on issues such as ESG investing. Environmental and economic issues run the risk of becoming battlegrounds for broader ideological conflicts.
What is Climate Action 100+?
Launched in 2017 at the One Planet Summit, Climate Action 100+ is an investor-led climate action initiative. It was co-founded by five investor networks: The Asia Investor Group on Climate Change, Ceres, the Investor Group on Climate Change, the Institutional Investor Group on Climate Change, and Principles for Responsible Investment. The initiative targets 170 companies in heavily polluting sectors like oil and gas, transport, steel, and chemicals. By focusing on the most polluting companies, Climate Action 100+ aims to drive significant change where it is most needed, demonstrating the power of collective investor action in addressing climate risks.
The 700 investors that are now part of Climate Action 100+ commit to ensuring these companies take necessary action to curb their emissions. The initiative also rolled out its Net Zero Company Benchmark in September 2020, measuring companies’ performance on emissions reduction, governance, and net zero commitments.
Antitrust Allegations Against Climate Action 100+
Effectively addressing climate change requires collaborative effort across companies, sectors, and markets. However, this unified approach has raised antitrust concerns. The anti-ESG movement argues that while collaborative action is beneficial for achieving environmental goals, it could lead to market manipulation and reduced competition. This perspective is unsurprising given the composition of the Committee, led by Chairman Jim Jordan, who has benefitted from $250,000 in donations from polluters.
The Committee claims Climate Action 100+’s activities may constitute “anticompetitive collusion”. A June report released by the majority of the Committee alleges that a “climate cartel” of environmental activists and financial institutions colludes to force “American companies to ‘decarbonize’ and reach ‘net zero’”. The report criticises ESG investors’ strategies, including efforts to increase disclosures, reduce emissions, and enforce these requirements. It argues that additional disclosures, such as Scope 3 emissions, negatively impact companies’ output and reputation without offering a “procompetitive justification”. The Committee contents that emissions reduction proposals by shareholders similarly reduce companies’ output and that enforcing these requirements is “handcuffing corporate management and muzzling free speech”. Overall, the report suggests that Climate Action 100+ coordinates to reduce output for target companies through enhanced disclosures and emissions reductions. This argument reflects a broader scepticism towards climate action within certain political factions, where it is often viewed as an impediment to economic growth.
However, according to Climate Action 100+, its actions do not violate antitrust laws, which aim to safeguard competition and prevent practices that harm consumers but do not prohibit collaboration among investors. A counter-report by the Committee’s Democratic members argues that the legal theory underpinning the Republican investigation is flawed. They assert that no antitrust theory prevents private investors from collaborating to manage climate risks or from inquiring about corporate transition plans to a climate- resilient economy. The counter-report suggests that the true objective of the Committee’s investigation is to intimidate investors into withdrawing from the ESG partnerships through politically motivated attacks.
An independent legal memo by Jenner & Block LLP, commissioned by the United States Sustainable Investment Forum and Sphere, finds no bases in law for threats that shareholders acting to consider climate risk are violating either antitrust or fiduciary laws. They refer to the allegations as “an overreach at best and a misrepresentation of the law at worst”. The memo concludes that legal theories so far put forward by the Republicans are unlikely to succeed in litigation.
Fiduciary Duty and ESG Investing
Beyond antitrust allegations, there are claims that Climate Action 100+ investors are breaching their fiduciary duty by “prioritizing woke investments”. Institutional investors and asset managers have a fiduciary duty to act in the best interest of those whose money they manage. The interpretation of this duty in relation to ESG considerations varies widely. However, it is safe to say there is an evolving understanding of fiduciary duty, where financial returns and ethical considerations increasingly intersect.
A 2019 report by several international organisations, including Principles of Responsible Investment, found that incorporating ESG issues into investment analysis and decision-making is required to comply with fiduciary duty. Harvard Law professors Max Schanzenbach and Robert Sitkoff take a middle ground arguing that ESG investing aligns with fiduciary duty if it improves risk-adjusted returns and if improved return is the exclusive motive. However, Climate Action 100+ is not traditional ESG investing. The 170 focus companies are not ESG-friendly but are significant polluters. Climate Action 100+ operates from the principle that climate risk is financial risk, arguing that urging companies to decarbonise and manage climate risk ultimately protects financial value.
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