In a year of antitrust changes, a recent development in the United States is prompting companies interested in environmental, social and governance (ESG) initiatives to take a second look at their programs to ensure they comply with antitrust laws . This Legal Update discusses this news, other ESG-related antitrust news and insights 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 U.S. senators, including Senators Tom Cotton and Charles Grassley, sent a letter to dozens of leading law firms warning them to “fully inform clients about the risks posed to them by participating in climate cartels.” and other ill-advised ESG schemes are emerging.” They indicated there would be pending investigations into alleged collusion aimed at, for example, restricting the use of coal, oil and gas.
The letter follows a discussion of ESG guidelines at a September hearing held by the Senate Judiciary Subcommittee on Competition Policy, Antitrust and Consumer Rights. At the hearing, Senator Cotton questioned 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 limit the… offers have been made [through net zero commitments] is fundamentally unlawful.” FTC Chairman Khan responded that there was no exception to antitrust laws for ESG-related agreements, and AAG Kanter responded that he “agreed[d] with a sense that collusion is anticompetitive.” Aside from the enforcers agreeing to the truism that collusion is illegal and reiterating that ESG efforts are not exempt, there is currently no indication that the Biden administration is committing to it prepared to launch antitrust investigations in this area. On the contrary, the Biden administration proposed a rule on Nov. 10 that would require major federal contractors to publicly disclose their greenhouse gas emissions and climate-related financial risks and set emission reduction targets, citing “significant financial risks” from climate change. And affected companies are beginning to fight back as the Kentucky Bankers Association and another group file a lawsuit against Kentucky AG, Daniel Cameron, challenging his authority to require six major banks to detail their ESG-related activities .
In other regions of the world
Antitrust scrutiny of ESG initiatives has also become stricter around the world. In May, the European Commission’s antitrust authorities conducted a “dawn raid” on several European fashion houses that signed a 2020 open letter calling for collaboration to reduce waste in the fashion industry. To help companies better deal with these problems, in October the European Commission adopted a revised Informal Guidance Communication, which provides an enhanced mechanism for companies to gain greater assurances – through so-called “guidance” – on the application of EU competition rules receive new or unresolved questions about sustainability agreements. Concerns have been raised in industry-wide coalitions and assemblies. For example, in October, a leading net-zero organisation, the Glasgow Financial Alliance for Net Zero (GFANZ), advised its members that its guidance and requirements on phasing out fossil-fuel finance are now optional and no longer required, like the Chair of GFANZ, Mark Carney, noted This development was related to potential antitrust concerns.
How to minimize ESG antitrust risk
Antitrust laws penalize agreements with competitors, but companies should feel empowered to pursue ESG goals when adequate antitrust protections are in place. Here are some practical considerations for mitigating risk in ESG:
- Commonly petitioning legislators to adopt an ESG rule or standard carries low antitrust risk (provided known antitrust safeguards are in place).
- Unilateral declarations of ESG goals raise far fewer antitrust issues than joint actions or agreements. Although acts or promises made alone may not be risk-free when your company has a significant market share, they typically do not raise the same antitrust issues as promises made to competitors.
- Entering into agreements with others increases antitrust risk. In the absence of hard antitrust conduct, U.S. courts typically assess antitrust liability for an agreement according to an adequacy or balancing standard. The assessment focuses on the competitive effects of the agreement, whether it has pro-competitive grounds and whether any resulting restraint of competition is reasonable based on the group’s objectives, the need for the restraint and related factors. Careful engagement can mitigate such risks. Some examples:
- Consider how your agreement will affect the market. In general, if the impact of the restriction on the market is limited, the restriction can be considered appropriate. For example, an optional, non-binding code of conduct for companies to promote environmentally friendly practices is likely to raise fewer antitrust concerns than a mandatory standard.
- Avoid agreeing on prices, deliveries, exchanging confidential information, offers and other specific business activities.
- If an industry player invites you to join such an arrangement, including under ESG auspices, consult an attorney.
- Avoid allowing an ESG group established for meritorious purposes to become a channel for the exchange of competitive information between competitors. When information needs to be shared, sharing it in an aggregated, anonymized form helps address antitrust concerns.
As ESG standards and norms are changing rapidly, companies should keep abreast of developments and consult antitrust advisors on ESG-related discussions.
Additional author: Katherine Aragon.