Corporate coordination to mitigate climate change raises complex questions for competition policy. From a structural antitrust perspective, climate alliances comprised of large asset managers can raise the specter of unaccountable “private governance,” if effectively imposing clean-energy restraints across an entire sector. But from an econometric perspective, which seeks to optimize consumer welfare, institutional investors may possess a strong procompetitive rationale for mitigating systemic climate risk, particularly with their clients’ diversified investment portfolios vulnerable to such risks. More broadly, given the capital-intensive burdens faced by first-movers in a clean-energy transition, climate alliances offer the promise of addressing negative externalities harmful to all, while enabling their members to thrive in a competitive marketplace.

In Texas v. BlackRock (E.D. Tex.) (“BlackRock”), 13 state attorneys general claim that institutional-investor defendants BlackRock, State Street, and Vanguard (the latter of these three recently settled) unlawfully reduced output at coal companies they partially owned, via participation in climate alliances. Most BlackRock commentary has focused on the complaint’s novel antitrust challenge, under Section 7 of the Clayton Act, to “horizontal shareholding” scenarios, where an institutional investor holds significant shares in multiple firms across a single industry. Yet our new CPI Antitrust Chronicle article traces pivotal connections between BlackRock’s lower-profile Sherman Act Section 1 unlawful coordination claims, and its hot-button Section 7 analysis. We outline three foundational antitrust concerns insufficiently addressed by the BlackRock plaintiffs: how to establish that ostensible climate-mitigation measures amount to an anticompetitive output restriction, how to properly define the relevant market amid our transition to a green economy, and the appropriate standard of review for Section 7 solely-for-investment analysis.

Key findings include:

Emissions Reductions Are Not Equivalent to Output Reductions. BlackRock’s theory of harm under Section 1 (and also under Section 7) centers on an output-reduction conspiracy, alleging that defendants coordinated diminished production at coal companies where they owned shares, in order to intensify demand, raise prices, and boost profit margins. But by focusing on climate-alliance emissions commitments, BlackRock misapplies antitrust’s output-reduction analysis to restraints on firms’ negative externalities (here, greenhouse-gas byproducts), rather than on their supply of economic goods (here, carbon-based energy sources). Moreover, climate-alliance net-zero pledges do not even amount to an emissions-reduction agreement, since a firm could realize net-zero goals through carbon offsets, while pursuing constant or even increased output and emission levels. Commercial offsets’ availability through an instantaneous transaction further precludes a Section 1 cartel from relying on net-zero pledges to reliably predict participants’ near-term production plans.

Calls to Limit Horizontal Shareholding Focus on Concentrated Markets, an Unlikely Fit for BlackRock. Academic critics of horizontal ownership have focused on “concentrated” or “oligopoly” markets. Federal antitrust agencies likewise argue that tailoring enforcement this way protects “the critical role of asset managers” in today’s investment markets, while also curtailing attempts “to mask…illegal, anticompetitive behavior behind the veil of passive investing and good governance principles.” BlackRock’s claims challenge this nuanced policy vector, because the allegations all tie back to climate-alliance agreements that differentiate coal products no further than the broad “thermal coal” category. According to prevailing metrics for assessing market concentration, as well as the plaintiffs’ own economic analysis, the thermal coal market does not come close to being even “moderately concentrated.”

Solely-for-Investment Challenges Under Section 7 Face Greater Evidentiary Burdens than Section 7 Merger Cases. Unlike the incipiency standard for a typical merger case (under which plaintiffs need only show that defendants’ actions “may…substantially…lessen competition” in “any activity affecting commerce”), claims against asset managers’ Section 7 solely-for-investment exception must meet an evidentiary burden closer to Section 1’s standard (establishing acts that “bring about, or attempt to bring about” anticompetitive harm). Articulating clear lines of antitrust analysis takes on heightened relevance in the BlackRock case, because the Section 7 and Section 1 claims both rely on the same alleged anticompetitive conduct (horizontal shareholders’ output agreement, facilitated through climate-alliance emissions commitments). Climate-alliance members who are not horizontal shareholders should only be assessed through Section 1 standards of harm, necessitating plaintiffs’ establishment of real-world effects. Similarly, Section 7 challenges to horizontal shareholders’ solely-for-investment status must show “evidence of post-acquisition behavior and effect.” Should the court instead apply an overgeneralized incipiency standard, treating the defendants’ emissions initiatives as an “activity affecting commerce” which “may” lessen competition, BlackRock’s (and a broader range of state anti-sustainability initiatives’) antitrust shorthand of guilt-by-climate-association will only become more widespread, regrettably with the judiciary’s imprimatur.

Read the full article here.