In a year full of antitrust shakeups, a recent development in the United States has companies interested in Environmental, Social and Governance (ESG) initiatives taking a second look at their programs to ensure they comply with antitrust laws. This Legal Update discusses that news, other ESG-related antitrust news, and takeaways for companies looking to engage in ESG initiatives while staying out of the crosshairs of antitrust authorities.
In the United States
On November 3, 2022, five US senators, including Senators Tom Cotton and Charles Grassley, sent a letter to dozens of top law firms warning them to “fully inform clients of the risks they incur by participating in climate cartels and other ill-advised ESG schemes.” They suggested that there would be upcoming investigations into allegedly collusive agreements aimed at curtailing the use of coal, oil, and gas, for example.
The letter follows a discussion of ESG policies at a September hearing held by the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights. At the hearing, Senator Cotton asked Federal Trade Commission Chair Lina Khan and Assistant Attorney General (AAG) Jonathan Kanter about the antitrust implications of ESG coordination, including through collective net zero climate commitments, and “whether collusion to restrict supply [through net zero commitments] is generally unlawful.” FTC Chair Khan replied that there is no exemption from the antitrust laws for agreements relating to ESG, and AAG Kanter answered that he “agree[d] with the sentiment that collusion is anticompetitive.” But beyond enforcers agreeing with the truism that collusion is illegal and affirming that ESG efforts are not exempt, there is currently no indication that the Biden administration is preparing to launch antitrust investigations in this space. Quite the contrary, on November 10, the Biden administration proposed a rule that would require major federal contractors to publicly disclose their greenhouse gas emissions and climate-related financial risks and set emissions reduction targets, citing “significant financial risks” from climate change. And targeted companies are beginning to push back, with the Kentucky Bankers Association and another group filing a lawsuit against Kentucky AG Daniel Cameron challenging his power to require six big banks to detail their ESG-tied activities.
In Other Areas of the World
Antitrust scrutiny of ESG initiatives has been heating up globally as well. In May, European Commission antitrust regulators conducted a “dawn raid” of several European fashion houses that signed a 2020 open letter calling for collaboration to reduce waste in the fashion industry. To help companies better navigate these issues, in October, the European Commission adopted a revised notice on informal guidance providing an expanded mechanism for businesses to obtain greater assurances—through so-called "guidance letters"—on the application of the EU competition rules to novel or unresolved questions around sustainability agreements. Concerns have begun to materialize within industry-wide coalitions and gatherings. For example, in October, one leading net zero organization, the Glasgow Financial Alliance for Net Zero (GFANZ), advised its members that its guidance and requirements regarding phasing out fossil finance would now be optional rather than required, and GFANZ chair Mark Carney noted this development was related to potential antitrust concerns.
How to Minimize ESG Antitrust Risk
Antitrust laws disfavor agreements with competitors, but companies should feel empowered to pursue ESG goals if adequate antitrust safeguards are in place. Here are some practical considerations to help limit risk in the ESG space:
- Jointly petitioning lawmakers to adopt ESG rules or standards carries little antitrust risk (provided that familiar antitrust safeguards are in place).
- Unilateral statements of ESG goals raise far fewer antitrust issues than joint action or agreements. Although actions or promises made alone might not be free of risk if your company has significant market share, they typically don’t pose the same antitrust issues as promises made with competitors.
- Entering into agreements with others increases the antitrust risk. Absent hardcore cartel conduct, US courts will typically assess antitrust liability for an agreement under a reasonableness or balancing standard. The evaluation focuses on the competitive effects of the agreement, whether it has procompetitive justifications, and whether any resulting restraint on competition is reasonable based on the group’s objectives, the necessity of the restraint, and related factors. Careful engagement can mitigate any such risks. Some examples:
- Consider how your agreement will affect the market. Generally, if the market impact of the restraint will be limited, the restraint may be deemed reasonable. For example, an optional, non-binding code of conduct among companies to encourage environmentally friendly practices is likely to raise fewer antitrust concerns than a compulsory standard might.
- Avoid agreements on pricing, supply, sharing of sensitive information, bids, and other specific business activities.
- If an industry player invites you to join such an agreement, even under ESG auspices, reach out to counsel.
- Avoid allowing an ESG group set up for laudable purposes to become a conduit for sharing competitively sensitive information among competitors. If information does need to be shared, disseminating it in aggregated, anonymized form helps mitigate antitrust concerns.
With ESG standards and norms changing rapidly, companies should stay abreast of developments and reach out to antitrust counsel on ESG-related discussions.
Additional author: Katherine Aragon.