In what may be the first substantial US anti-ESG lawsuit, the State of Tennessee filed a complaint against investment management firm BlackRock. Surprisingly, the complaint does not arise in the form of an antitrust suit, which has been the rallying cry of many Republican Attorneys General who have threatened past enforcement. Instead, the claim could be described as possibly the first greenhushing lawsuit. The complaint alleges two primary misrepresentations:
- That BlackRock considers ESG factors even in investments not marketed as being ESG aligned;
- That BlackRock overstates the financial value of its ESG investments.
The complaint summarizes its arguments as follows:
“In short, BlackRock has engaged in a series of unlawful ESG-related misrepresentations and omissions in connection with the marketing or sale of its investment products and services to Tennessee consumers. BlackRock has downplayed the extent to which ESG considerations drive its investment strategies across all holdings, even in non-ESG funds. And BlackRock has overstated the extent to which ESG considerations can affect companies’ financial performance and outlook.”
The lawsuit relies on several statements from BlackRock which the Attorney General sets up to appear contradictory. For example, the Complaint quotes BlackRock as stating:
“Sustainability characteristics… can provide insight into the effective management and long-term financial prospects of a fund.”
The AG then contrasts that to a standard disclaimer that sustainability metrics:
“do not provide an indication of current or future performance nor do they represent the potential risk and reward profile of a fund.”
To me, these statements are not fundamentally at odds. The first is saying that a company’s sustainability performance can serve as a bellwether for long-term management, while the second states sustainability metrics don’t guarantee financial performance (Lawrence wrote about that last month). However, Tennessee’s AG sees things differently.
The complaint then takes a surprising turn that may serve as a warning for other companies – it uses BlackRock’s move away from using the term “ESG” against the firm. Arguing that publicly disowning ESG while privately embracing it sends a misleading message to consumers. But BlackRock isn’t the only company that moved away from ESG terminology lately while maintaining ESG practices. This lawsuit may have those companies question the wisdom of that decision.
This highlights a conundrum faced by companies who have chosen to step back from using “ESG”. Companies backing off ESG entirely will undoubtedly see a slew of lawsuits from blue state AGs alleging breaches of fiduciary duty and misrepresentations. If they stick to ESG they may have red state AGs alleging anti-trust violations. Ultimately, making such a pivot creates a perception of trying to have your cake and eat it too, resulting in more risk than sticking to your original messaging. Trying to tread a middle path also comes with risk as this complaint shows. At this juncture, it boils down to which battle you prefer to fight – which some may see as an indicator of how seriously the company takes ESG.
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