The ESG Backlash Can’t Keep Its Story Straight:
What the Vanguard Settlement Reveals

Frederick Alexander

The movement to discredit ESG investing claims to protect investors and consumers but really operates to shield corporate executives from their shareholders—part of a troubling effort to protect the powerful from accountability across the United States. This reality is illustrated by the recent partial settlement of a lawsuit brought by 11 states against Vanguard, BlackRock, and State Street—the so-called “Big Three” asset managers that dominate the U.S. market.

At its core, ESG investing reflects a simple idea: investors should consider how social and environmental factors affect the companies they own. Yet right-leaning politicians have spent years attacking investment professionals who account for risks like climate change and inequality, claiming that such consideration sacrifices financial return in order to pursue “woke” goals.

This critique was on full display in a 2023 letter from 21 state attorneys general, who threatened major asset managers—including the Big Three—for encouraging companies to reduce greenhouse gas emissions and joining investor initiatives like Climate Action 100+ and the Net Zero Asset Managers Initiative.

With no sense of irony, many of these same officials then brought a lawsuit accusing the Big Three of doing the opposite—seeking too much profit. Led by Texas, the states alleged that the asset managers used their coal companies shares to coordinate output reductions, thereby raising prices and profits. The same climate initiatives earlier cited as evidence of a bias against financial performance were repurposed as evidence of profit-maximizing collusion.

Both claims cannot be true. One posits that asset managers reduce profits to pursue social goals; the other says they pursue profit so aggressively that they break the law. However, while the claims are contradictory, the remedy sought is the same: restrict the voice and power of shareholders. This convergence reveals the true motive of the states: limit shareholder influence over corporate decision-making, particularly on climate risk.

That objective becomes clearer in the recent settlement agreement between the states and Vanguard (BlackRock and State Street continue to fight the case). In addition to a payment, Vanguard agreed to five years of sweeping restrictions that go far beyond the anticompetitive conduct contemplated by the lawsuit. Vanguard agreed not to engage with companies for the purpose of reducing greenhouse gas emissions or advancing climate-related goals, not to participate in organizations that promote such objectives, and to sharply curtail its use of basic stewardship tools. As to the latter, it will not submit shareholder proposals, solicit proxies, or use the threat of selling shares to influence corporate behavior. Notably, these restrictions apply only to U.S.-domiciled companies held in U.S. funds.

Such constraints go far beyond preventing collusion. They eliminate standard, lawful mechanisms through which shareholders hold management accountable. The practical effect is significant. Vanguard has limited its ability to address some of the most important financial risks facing its clients. If reducing emissions improves long-term portfolio performance—as many analyses suggest—the settlement casts doubt on Vanguard’s ability to pursue that objective. More broadly, it removes tools that could be necessary to respond to any material risk, regardless of its source. In resolving its own business concerns about legal exposure, Vanguard appears to have constrained its capacity to fully serve its clients’ financial interests.

Tellingly, the settlement is also disconnected from the antitrust theory it purportedly addresses. Its restrictions apply even where there is no plausible risk of coordination. Indeed, by forcing Vanguard into near-complete passivity, the agreement may even weaken competitive pressures within industries, since shareholder demands for growth and performance are often a key driver of competition.

So who benefits if not the investors and consumers the states claim to be protecting? Not surprisingly, the winners are corporate executives, whom the settlement shields from shareholder oversight. This is especially pertinent where corporate strategies generate profits by imposing costs on the broader economy. For diversified investors, including millions of workers saving for retirement through index funds, those costs matter.

Climate change is the clearest example. While higher fossil fuel production may boost firm-level profits for companies that patronize politicians, the resulting damage imposes costs across the entire economy. Some estimates suggest that unmanaged warming could reduce the value of diversified portfolios by 30 to 50 percent over the coming decades. By the same token, consumers—including coal consumers– will bear the costs if energy markets fail to transition in an orderly way.

Seen in this light, shareholder efforts to address climate risk are neither “woke” nor anticompetitive. They are an attempt to preserve the value of the economic system upon which both investors and consumers depend. The truth is that the anti-ESG campaign is not designed to protect investors or consumers: when it succeeds, the only winners are corporate executives and the politicians who serve them.