ESG Initiatives Come Under Increasing Antitrust Scrutiny
- In recent months, regulators’ warnings that ESG initiatives could raise potential antitrust concerns have only become louder. But regulators have failed to provide companies with any practical guidance.
- Adding to the uncertainty around ESG policies is the political divide along party lines among federal and state regulators.
- Against this backdrop, companies are forced to navigate the grey areas between ESG initiatives and potential antitrust risks. But there are strategies companies can use to minimize their legal risks and protect their ESG initiatives from antitrust challenges.
The Bottom Line
Over the past several years, enforcers have raised concerns that ESG activities could implicate antitrust laws. In addition to actions by enforcers, Republican lawmakers have been at the forefront of using antitrust law to push back on ESG initiatives.
In September 2019, the Department of Justice’s Antitrust Division (the DOJ) launched an investigation into whether automakers that agreed with the state of California to stricter emission standards than the Trump Administration’s standards violated federal antitrust laws. Ultimately, after finding no evidence of collusion among the companies, the DOJ closed its investigation.
In August 2022, 19 state attorneys general wrote to the CEO of BlackRock about the company’s commitment to ESG principles. They claimed that BlackRock’s coordinated conduct with other financial institutions to impose net zero emissions goals could amount to group boycotts, restraints of trade, or concerted refusals to deal in violation of Section 1 of the Sherman Act. A month later, during a Senate Judiciary Committee hearing, in response to a question related to BlackRock, Federal Trade Commission Chairwoman Lina Khan and Assistant Attorney General Jonathan Kanter of the DOJ both confirmed that there is no ESG exception to the antitrust laws.
In October 2022, 19 state attorneys general served civil investigative demands onto six large U.S. banks seeking documents related to the banks’ participation in the UN’s Net-Zero Banking Alliance, a global climate change initiative, based on alleged antitrust concerns.
In November 2022, five Republican U.S. senators advised large law firms to inform their clients of “the risks they incur by participating in climate cartels and other ill-advised ESG schemes.” The letters stated that “Congress will increasingly use its oversight powers to scrutinize the institutionalized antitrust violations being committed in the name of ESG . . . .”
Shortly thereafter, D.C. Attorney General Karl A. Racine and 17 other state attorneys general wrote a letter to members of Congress pushing back on what they considered Republican anti-ESG stands. The letter emphasized that “[a]n expression of general recommendations or a statement in favor of or against certain policies does not, without more, constitute a violation of the Sherman Act.”
In December 2022, Republican members of the U.S. House of Representatives Committee on the Judiciary sent a letter to leaders of Climate Action 100+, an investor-led ESG initiative, requesting documents and communications about the initiative’s role coordinating companies to pursue ESG goals that, according to the authors, could violate antitrust laws.
On March 30, 2023, 21 state attorneys general sent yet another letter. This time they sent it to some of the largest asset managers in the United States expressing concern over asset managers’ adoption of ESG initiatives, including Climate Action 100+ and other climate-related initiatives. The letter explained that commitments from boards to reduce greenhouse gas emissions may amount to horizontal agreements that “unreasonably restrain and harm competition.” Additionally, the authors suggested that the managers may be engaging in group boycotts by refusing to deal with entities that do not support ESG initiatives. For example, the authors took issue with As You Sow, a nonprofit shareholder advocacy group, that, according to the authors, is “pushing three companies to stop using Vanguard as the default plan for their employee 401(k) accounts . . . .” Managers “voting for the exclusion of one their competitors has,” according to the authors, “clear antitrust implications.”
Most recently, on May 15, 2023, 23 state attorneys general sent a letter requesting documents from insurers in the Net-Zero Insurance Alliance (NZIA), an initiative to help the insurance industry transition to a low-carbon economy, and alleging that the NZIA’s work appears to violate federal and state antitrust laws. Similar to prior letters, the authors express concern that participation in ESG initiatives could constitute collusive behavior in violation of antitrust laws. The letter begins by asserting that NZIA protocol requires participating insurers to adopt defined targets that are “anything but aspirational” and that appear to violate antitrust laws. The letter provides specific examples of the alleged violations.
First, the letter claims that NZIA’s emission reduction targets force insurers’ customers to meet certain environmental conditions, which, according to the authors, can “influence the entire [insurance] industry . . . , dramatically increase prices,” and decrease output. Next, the letter explains that certain NZIA targets single out selected clients, which, according to the letter, “may be an illegal boycott.” Additionally, the letter suggests that certain targets that “force insurance companies to increase the proportion” of their business that insures climate solutions “may be an illegal restraint of trade” that forces insurers “to collectively move toward a product when there is not necessarily commensurate market demand for that product and move away from products actually demanded by the market.” The letter includes a detailed list of documents that the recipients are to produce related to insurers’ participation in NZIA.
These recent developments raise the stakes for ESG initiatives, showing that states may be willing to explore a range of antitrust theories to challenge certain ESG initiatives. When companies collaborate to implement ESG initiatives, they may raise the proverbial alarm bells of antitrust enforcers. Section 1 of the Sherman Act, as well as various state laws, make it illegal for companies to enter into agreements that unreasonably restrain competition. Certain agreements between competitors that have no other purpose except to stifle competition are per se illegal. Examples of conduct subject to the per se treatment include price fixing, bid rigging, and territorial allocations between competitors. Agreements that do not fall into the above categories are subject to a rule of reason analysis or a balancing test between the agreement’s pro-competitive and anticompetitive effects to determine its legality.
But not all conduct is reasonably likely to raise antitrust concerns. In the United States, antitrust laws are designed to protect competition and prevent companies from engaging in practices or agreements that unreasonably restrain competition. Unilateral or independent conduct, thus, is less likely to raise antitrust concerns. This is particularly true with companies that lack market power—i.e., the ability to raise price above the competitive level without becoming unprofitable due to loss of sales to competitors. Such companies’ engagement in unilateral ESG initiatives is unlikely to raise alarms.
Companies can take certain steps to mitigate their antitrust exposure:
- As a threshold matter, companies should consult with counsel before engaging in ESG initiatives coordinated with other companies.
- Avoid ESG initiatives that suggest joint refusals to deal or amount to group boycotts. An example of a joint boycott in an ESG context may be an ESG initiative among multiple firms that pressures customers or suppliers in that industry to boycott the firms’ competitors who do not comply with the standards set by the group. Similarly, an ESG initiative that sets standards so high that it prevents new companies from entering the market may implicate antitrust laws.
- Avoid improper information sharing. ESG initiatives that require participants to share competitive information, such as price information, sale plans, customer-specific discounts, or salary information, to name just a few examples, may implicate antitrust laws. Companies should likewise avoid any information sharing that allows competitors to infer such competitive information.
- Maintain a clear record of the company’s pro-competitive rationale for engaging with an ESG initiative and consult counsel before proceeding.
As the ESG landscape evolves, so too do the views of lawmakers and enforcers on the intersection between ESG and antitrust. Ballard Spahr’s Antitrust and Competition Group is prepared to answer questions regarding antitrust issues in the context of ESG initiatives.
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