Investors pursuing environmental, social, and governance (ESG) programs or applying sustainability standards have recently faced high-profile antitrust accusations, leading some to reconsider their participation in certain sustainable investment groups. On August 9, 2024, Climate Action 100+ confirmed the withdrawal of a major investor from the initiative, less than two weeks after the Judiciary Committee of the U.S. House of Representatives had sent information requests to more than 130 of the group’s members as part of an investigation into ESG programs. This follows numerous similar requests by the Committee since December 2022, as well as similar requests and threats of legal action against asset managers by some State Attorneys General since August 2022.
Companies that collaborate to improve the sustainability of their activities, such as participants in ESG initiatives or those developing or adhering to sustainability standards, may be surprised to regard these collaborations as presenting antitrust risks. Understanding the antitrust accusations being made, their context, and what they mean broadly for sustainability cooperation can help recognize and manage such risks while enabling companies to continue pursuing worthwhile sustainability efforts.
What Is Driving the Loudest Antitrust Accusations?
High-profile antitrust accusations against ESG initiatives are part of a broader anti-ESG “backlash” movement in the United States with a significant partisan political dimension, which can generate political benefits for those asserting the claims as well as partisan disagreement over their merit. Most prominently, the Judiciary Committee published a June 11, 2024 Report alleging that left-leaning organizations and investors have formed a “climate cartel” to force companies to reduce carbon emissions, and a subsequent press release threatened that members “must answer for … prioritizing woke investments.” Meanwhile, Judiciary Committee minority party staff published a Counter-Report attacking the investigation and Report as a legally meritless effort to subpoena evidence for subsequent action by politicized law enforcement.
As articulated by the Committee Report, opponents of sustainable investment programs typically frame them as “group boycotts,” a type of conduct that under certain circumstances is unlawful per se. In particular, they claim that financial institutions and climate activists have colluded to exert collective pressure on businesses to reduce emission-intensive activities, including through coordinated shareholder activism and by withholding or threatening to withhold capital from those businesses. The Committee Report further asserts that these actions harm businesses and consumers by misallocating capital and artificially increasing the cost of providing products and services, particularly those involving fossil fuels. Finally, the Committee Report argues that environmental sustainability goals are “public interest” objectives that are not cognizable procompetitive justifications under the antitrust laws.
These antitrust claims exploit a degree of legal uncertainty that arises under U.S. antitrust law due both to its decentralized, law-enforcement framework and to the absence of recent precedent clarifying subjects such as concerted refusal to deal and coordination to achieve non-economic objectives. This uncertainty in turn magnifies the real and perceived legal and reputational risks of coordinated sustainability or ESG efforts, sometimes independently of their merit under traditional analysis. By contrast, some European authorities, which have a more centralized, administrative competition enforcement framework, have sought to improve legal certainty surrounding sustainability collaborations by providing explicit guidance on how competition law addresses them.
Even if there may be a political motive driving some of the rhetoric on this issue, there is an underlying truth that poorly structured collaborations between companies can generate antitrust risk, including for ESG or sustainability initiatives. Thus, it is wise for companies to think through how they structure their participation in such efforts.
If ESG Programs Involve Antitrust Risk, How Can Companies Still Work Together to “Save the Planet”?
Addressing globally significant environmental and social issues frequently requires collaboration and collective effort, which can affect aspects of competition and raise antitrust risk even though coordinated sustainability or ESG programs are not antitrust violations in themselves. Further, many related activities, like setting or adhering to sustainability standards (which includes targets and goals), can adversely impact some market participants and give them reason to cry foul. Prominent antitrust allegations against sustainable investing groups have brought into focus that even well-intentioned sustainability initiatives can create risks, but they have also shown the limits of opponents’ legal theories that can help mitigate those risks.
For these reasons, companies that collaborate to promote sustainability should approach such projects with the same care as other competitor collaborations, while recognizing that collaboration not motivated (entirely or directly) by profit can raise peculiar issues. Companies can recognize and mitigate the resulting risks in the following ways:
- Ensure antitrust compliance programs cover sustainability efforts and ESG policies. A company may have committed to sustainability initiatives without reviewing them for antitrust compliance, and employees involved in them might not have received compliance training. For example, employees might decide to join trade associations or other groups where sustainability, good governance, or ethical standards or objectives are jointly developed. Employees may decide to join voluntary programs or certification schemes where participants might agree to certain activities, standards, or industry targets (such as ethical sourcing of raw materials), allowing the company to use trust marks and logos. Employees may decide to stop using a specific chemical in their packaging or product because of third-party or trade association recommendations about their environmental impacts. Each of these is a form of collaboration that could potentially raise antitrust issues. The first steps are therefore to review existing arrangements for antitrust risk, consult antitrust counsel when engaging in any sustainability cooperation or adhering to any standard (particularly one that competitors may adhere to), and train relevant employees in antitrust compliance. In doing so, ensure legal counsel is versed in the particular antitrust issues sustainability cooperation can raise, which may be out of the ordinary for generalist practitioners – and also far outside the remit of other employees in a company more concerned about, for example, product stewardship and safety.
- Look to non-U.S. jurisdictions’ guidance – with caution. European authorities including the European Commission have provided detailed guidelines on how their competition laws address common forms of sustainability cooperation.[1] These guidelines can help to orient the competition analysis, but U.S. practitioners must be mindful of differences in the substantive law and policy they may reflect. For example, U.S. law might not recognize all theories of pro-competitive benefits that would be cognizable under E.U. law, and the Commission’s so-called “soft safe harbour” has no effect or counterpart under U.S. law. Similarly, some countries like Austria have enacted exceptions to their national competition laws that simply do not exist under U.S. antitrust law, and some authorities like the U.K. Competition and Markets Authority and Netherlands Competition Authority, have adopted distinctive rules regarding sustainability collaborations as matters of enforcement policy. At the same time, some non-U.S. jurisdictions’ competition law may be more onerous or restrictive than U.S. law. Therefore, merely because sustainability agreements or practices are regarded as permissible in one jurisdiction, does not mean that they are legally permissible in others.
- Identify the activities being restricted, against whom one competes through those activities, and whether restricting them disadvantages collaborators’ competitors. If ESG commitments or sustainability standards[2] involve refraining from activities by which one could otherwise compete, consider against whom the company would otherwise compete through those activities (in essence, the horizontally-affected market). Where those adopting a standard or otherwise limiting their competitive autonomy account for more than a small part of the market to which the affected activities are competitively-relevant, a careful assessment may be necessary to consider risk. By contrast, a standard restricting collaborators’ activities by which they could compete in a given market can disadvantage some participants in that market without necessarily harming overall competition there, particularly if it facilitates growth with other market participants or only a small share of the market adheres to it. For example, a sustainable investment standard can disadvantage some potential investment targets without harming competition in the capital markets in which the collaboration participants compete through the restricted activities. One should, however, also consider whether companies developing or adopting a standard that restricts activities in one market compete against a disadvantaged company (e.g., in a different market such as a vertically-related one), and, if so, how the standard affects competition there.
- Ensure standard-setting does not serve exclusionary purposes. Almost any standard-setting activity can be framed as a concerted refusal to deal, but that does not make it illegal. U.S. law has generally condemned such activities as “group boycotts” only where they were means to exclude or otherwise disadvantage their participants’ competitors, typically by causing suppliers or customers to cut off those competitors’ access to a supply, facility, or market necessary to compete.[3] Antitrust practitioners will recognize this as a vertical theory of exclusion. By contrast, standards that may support efficiency-enhancing arrangements, or which are set objectively and with safeguards to prevent them from being biased by participants with anticompetitive interests, are generally considered under the “rule of reason” taking into account their potential pro-competitive benefits.[4] Thus, one should consider both who is harmed and who benefits from the standard-setting activity and ensure the standards are objective and not affected by anticompetitive motivations, for example by involving a competitively-disinterested third-party authority in the standard-setting process.
- Carefully consider and substantiate the pro-competitive reasons for improving sustainability. Opponents of sustainability arrangements often dismiss environmental benefits as “public interest” goals, but the justifications for sustainability cooperation need not be so narrow. Issues like climate change may affect a company’s long-term prospects, making the sustainability of that company’s practices and its contribution to sustainability objectives matters of its independent economic interest. Further, companies frequently seek to attract customers, suppliers, and capital by marketing themselves as sustainable, making sustainability a dimension of competition itself. Where sustainable practices directly benefit the user of a product or service, this is a pro-competitive quality improvement. But even if the benefits are experienced directly by someone other than the user or consumer, the user or consumer may still value them, for example by preferring alternatives with a smaller carbon footprint. These improvements, which European authorities call “individual non-use value benefits,” are, in principle, also forms of quality improvements U.S. antitrust law recognizes as pro-competitive. But, as the European guidance stresses, authorities are likely to demand substantiation for such a claim, such as underlying market research that reliably demonstrates a willingness to pay.[5]
- Ensure any restriction on competition goes no further than reasonably necessary to achieve pro-competitive benefits. Once pro-competitive benefits are identified, ensure there are no restrictions on competitive activity other than what is reasonably necessary to achieve those benefits, and consider whether substantially less restrictive alternative restrictions would suffice.[6] Any means to “enforce” a standard or impose consequences for noncompliance, any restrictions on a collaborating company’s actions independent from the collaboration, or any direct or indirect restrictions on non-collaborators’ conduct (like the effective imposition of standards on them) call for particular attention in this respect. As with the pro-competitive benefits themselves, one should be prepared to substantiate any claim that they could not be realized without the collaborative restriction and any negative effects it has on competition.
- Take particular care in highly concentrated or dominant position markets. Antitrust and competition law compliance is particularly sensitive where the markets in question are highly concentrated (i.e., there are only a small number of effective competitors) and where one or more companies have a dominant position (e.g., monopoly, oligopoly). In these markets, any agreements (including oral) or generally-shared views on sustainability goals, objectives, outcomes, and programs or how to implement them should be carefully vetted for antitrust and competition law compliance from the outset. This includes ensuring that sustainability objectives and plans a company develops unilaterally cannot be regarded as an abuse of a dominant position, a means to acquire or maintain a monopoly, or otherwise a way to exclude actual or potential competition.
- Emphasize to non-practitioners that ignorance of antitrust or competition law and the lack of illegal or anticompetitive intent are not defenses. Employees may understandably see antitrust and competition compliance as being of trivial importance when trying to “save the planet,” and they may be ignorant of the nuances of competition law, particular outside their home jurisdiction. But this does not mean the consequences of violating antitrust and competition law are small, and it is not a defense to claim that more important goals were being served. Nor is subjective intent to violate the law or harm competition necessary, although, as explained above, the objective potential for financial benefit from reduced competition may affect the analysis (see “Identify the activities being restricted” and “Ensure standard-setting does not serve exclusionary purposes”). Agreements and cooperative arrangements with anticompetitive effects are outlawed in numerous jurisdictions worldwide, and companies adversely affected by sustainability or ESG initiatives have strong reason to complain and privately enforce these laws where possible. Even with the best intentions, companies seeking to improve sustainability ignore competition and antitrust law at significant risk.
For related insights on E.C. guidance on antitrust and sustainability, see It’s Not Easy Being Green: The European Commission’s New Guidance on Sustainability Agreements.
For further information, please contact:
Drake Morgan, Crowell & Moring
dmorgan@crowell.com
[1] See Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, 2023/C 259/01 (July 21, 2023), https://competition-policy.ec.europa.eu/document/fd641c1e-7415-4e60-ac21-7ab3e72045d2_en. See also https://www.crowell.com/en/insights/client-alerts/its-not-easy-being-green-the-european-commissions-new-guidance-on-sustainability-agreements.
[2] For the purposes of this article, “standards” is intended to mean standards not mandated by law, such as those U.S. companies may use to set out technical or non-technical specifications regarding their products, services, or supply chain, including any non-binding goals or industrywide targets. Examples might include a net zero emissions commitment, a commitment not to use certain materials, or a commitment only to do business with businesses meeting certain sustainability or fair trade metrics.
[3] See Nw. Wholesale Stationers, Inc. v. Pac. Stationery & Printing Co., 472 U.S. 284, 294 (1985). For examples of such cases, see Am. Soc’y of Mech. Eng’rs v. Hyrdolevel Corp., 456 U.S. 556, 570-78 (1982) and Radiant Burners, Inc. v. People’s Gas Light & Coke Co., 364 U.S. 656, 658-60 (1961).
[4] See Nw. Wholesale Stationers, 472 U.S. at 293-98; Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500 (1988).
[5] See E.C. Horizontal Cooperation Guidelines ¶¶ 575-81.
[6] See generally N.C.A.A. v. Alston, 594 U.S. 69, 96-97 (2021).
