A coalition of 13 Republican state attorneys general opened a new line of attack against corporate environmental, social and governance policies, this time before the Federal Energy Regulatory Commission.
The attorneys general, representing a broad cross-section of fossil fuel-heavy states, filed a Nov. 28 protest to Vanguard Group Inc.'s application (EC19-57) for blanket authorization to acquire shares of U.S. utilities under Section 203 of the Federal Power Act.
As the world's second-largest institutional investor, Vanguard and its affiliates hold approximately $6.7 trillion in global assets under management. Vanguard and other institutional investors regularly apply for blanket authorizations from FERC to acquire shares in U.S. utilities, which typically pay healthy dividends for return-seeking entities such as pension funds.
In August, FERC granted a nine-month extension to a 2019 blanket authorization provided to the Vanguard Group, its advisory subsidiaries and related entities, collectively referred to as Vanguard.
FERC's order prohibited any individual Vanguard fund from holding more than 10% of a utility's voting securities and set a 20% limit on the acquisition of utility shares in aggregate. Those requirements are designed to ensure institutional investors cannot exert control over publicly traded utilities.
On Nov. 7, Vanguard asked FERC to extend the blanket authorization for three years and let the agency know that it is no longer seeking to exclude externally advised funds from the 20% aggregate limit.
Vanguard explained that its funds can be divided into two categories. Its passively managed funds seek to mirror the performance of a specific index, while its actively managed funds involve buying and selling securities based on economic and financial market considerations.
Vanguard's actively managed funds are primarily externally managed funds, with both investment and voting authority on shareholder resolutions delegated to unaffiliated external advisers. Vanguard further explained that all of its relevant holdings are regularly disclosed to the U.S. Securities and Exchange Commission through Schedule 13G forms, which are only available to shareholders that do not plan to "influence or control" the security issuer.
Attorneys general cry foul
Nevertheless, the attorneys general said in their Nov. 28 protest that Vanguard may be running afoul of its Section 203 requirements by making commitments under a Net Zero Asset Managers initiative and participating in the Ceres Investor Network.
Pursuant to the Net Zero Asset Managers initiative, Vanguard in May pledged to ensure that its actively managed assets align with the goal of achieving net-zero greenhouse gas emissions by 2050 or sooner. The Ceres Investor Network also aims to advance sustainable investment practices and accelerate the transition to a net-zero emissions economy.
Those goals are in line with the Paris Agreement on climate change, a global pact the U.S. rejoined in February 2021.
"The groups Vanguard joined (despite Vanguard's specific commitments to the commission) aim to shift global electricity production from natural gas and coal from approximately 67% of global electricity to approximately 0%," the attorneys general said. "This will undoubtedly affect the cost and reliability of energy supplies."
The attorneys general represent Utah, Indiana, Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Montana, Nebraska, Ohio, South Carolina, South Dakota and Texas.
The attorneys general also cited Vanguard funds' support for shareholder resolutions requiring Warren Buffett's Berkshire Hathaway Energy to publish reports on climate-related risks and greenhouse gas emission targets.
Consumers "would be harmed" if Berkshire Hathaway Energy is forced to replace its coal-fired power plants in Utah with "more expensive energy sources," the attorneys general said. They therefore asked FERC to deny Vanguard's request for a blanket extension and hold a hearing on the matter.
PacifiCorp, a Berkshire Hathaway Energy utility that operates in Utah and other western U.S. states, in its 2021 integrated resource plan laid out a timeline for shutting down most of its coal-fired power plants by 2040.
"Whether and to what extent Vanguard has breached [FERC's authorization] are questions that could be aired and investigated at a hearing in this proceeding," the attorneys general said.
Twelve of the 13 attorneys general did not respond to a request for comment. In an emailed statement, Kentucky Attorney General Daniel Cameron said his office will "oppose any effort that will undermine Kentucky's economy, destroy good paying jobs, and make it harder for Kentuckians to heat their homes and feed their families."
Vanguard's response
A Vanguard spokesperson said the company is looking forward to FERC's regulatory process.
"As an investor-owned asset manager, Vanguard's role is to promote long-term value creation for investors in our funds, leaving management and policy decisions to companies and policymakers," the spokesperson said in an email.
In an interview, Ceres CEO Mindy Lubber said members of the nonprofit organization's investor network are focused on sharing best practices but act on their own accord. "It's a place for learning and education and information," Lubber said.
Lubber also disagreed with the idea that the transition to cleaner sources of energy will harm consumers.
In July, the U.S. National Oceanic and Atmospheric Administration reported that weather and climate-related disasters during just the first six months of the year cost the U.S. $9 billion, the fifth-highest tally on record.
"Responsible investors are looking at the financial risks of climate change and acting on them," Lubber said.
The Nov. 28 protest is the latest in a series of Republican-led efforts to crack down on corporate ESG policies.
On Nov. 3, five GOP senators warned 51 law firms that their clients' ESG initiatives could violate antitrust laws. In October, a coalition of 19 Republican attorneys general subpoenaed six of the largest U.S. banks over their involvement with the United Nations-convened Net-Zero Banking Alliance. That same month, Missouri banned BlackRock Inc., the world's largest institutional investor, from managing the state's $9.5 billion state pension assets due to the firm's ESG stance.
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