Hotly contested across party lines—and often borders—environmental, social, and governance (ESG) standards were the focus of recent dueling reports by the US House Judiciary Committee. Despite the deepening debate, what continues to be made clear is that collaboration within and among different market sectors is needed to set standards, measure progress, and develop and implement policies that can meet shared sustainability objectives—and this must all be done within the boundaries of permissible pro-competitive collaboration under the antitrust laws.
What exactly these boundaries are is a debate that has grown hotter than our planet, especially in the United States where the left and right have vastly different views on policy goals and permissibility of sustainability collaborations.
This debate was crystalized in a pair of sharply worded committee reports from the US House Judiciary Committee released on June 11, 2024. While these reports and other commentary from enforcement agencies, including most recently statements from the Office of the New York Attorney General, illustrate the deep political divide on climate change, they also provide insights into how firms may collectively establish ESG standards and goals within the bounds of antitrust laws.
The US House Judiciary Committee released an interim staff report on June 11 titled “Climate Control: Exposing the Decarbonization Collusion in Environmental, Social and Governance (ESG) Investing” (the Majority Report). The report argues that a coalition of left-wing environmental activists and major financial institutions have colluded to force American companies to decarbonize and reach net-zero emissions. It accuses certain organizations of waging a “war on the American way of life” by pressuring corporations to disclose and reduce carbon emissions, restricting corporate free speech, and raising consumer prices.
The Majority Report asserts that these actions constitute a “climate cartel” to eliminate carbon emissions, negatively impacting American consumers while ignoring other global factors such as OPEC+ output reductions, wars, and the long-term costs of climate change. The report does not include a legal analysis and suggests the need for potential legislative reforms.
On the same day, Democratic members of the House Judiciary Committee released a rebuttal report, “Unsustainable and Unoriginal: How the Republicans Borrowed a Bogus Antitrust Theory to Protect Big Oil” (the Rebuttal Report). The Rebuttal Report calls the Majority Report’s investigation misguided and an abuse of oversight authority. It offers an in-depth antitrust analysis, concluding that no antitrust law prevents private investors from collaborating to address climate change risks.
The Rebuttal Report emphasizes that ESG initiatives are voluntary, respond to investor demand for transparency, and do not represent a concerted scheme to achieve unlawful objectives. Instead, such collaborations are commercially sensible in that they enhance market efficiency and are subject to rule-of-reason analysis since the efforts do not intend to raise prices or exclude competitors. The Rebuttal Report also highlights the broader benefits of ESG initiatives such as mitigating climate-related risks and promoting sustainable investment practices.
The dueling federal reports highlight the increasingly sharp political tension over ESG initiatives that permeates through an increasingly complex set of red and blue state legislative efforts.
During a June 2024 event, Amy McFarlane, deputy bureau chief of the New York State Attorney General’s antitrust bureau, addressed concerns regarding potential antitrust violations in standard-setting collaborations on ESG goals. According to the New York AG’s Office, such collaborations are not unprecedented, and firms and antitrust lawyers can establish frameworks to avoid legal pitfalls while achieving pro-competitive and socially beneficial outcomes.
To find the appropriate balance, Deputy McFarlane highlighted the joint DOJ and FTC competitor collaboration guidelines issued in 2000 as a helpful analytical framework. These guidelines emphasize the need to avoid exclusivity, maintain independent decision-making, and minimize the sharing of competitively sensitive information. By adhering to these guardrails, companies can navigate the complexities of ESG standard-setting without necessarily running afoul of antitrust laws—although they may still face significant litigation risk.
When assessing the legality of standard-setting efforts, antitrust enforcers often apply a rule-of-reason analysis, which weighs pro-competitive benefits against any potential anti-competitive effects. Deputy McFarlane suggested that collaborations such as those seen in net-zero alliances would likely fall under the rule-of-reason framework rather than being considered per se illegal. A rule-of-reason approach allows for a nuanced evaluation of whether the benefits of collaboration, such as improved sustainability and innovation, outweigh the potential harm to competition.
Federal enforcers have been quick to note, however, that “ESG” is not a talisman against antitrust scrutiny. In response to questioning by the US Senate Judiciary Committee, both Federal Trade Commission Chair Lina Khan and Assistant Attorney General Jonathan Kanter emphasized that ESG initiatives do not get a free pass from regulatory scrutiny. Chair Khan noted that parties cannot use ESG commitments as a defense for anti-competitive behavior in merger reviews.
However, as Deputy McFarlane pointed out in her recent remarks, whether an ESG commitment can qualify as a remedy for anti-competitive concerns in the merger context is distinct from whether collaborative ESG efforts pass antitrust muster in the standard-setting context.
The intersection of ESG and antitrust law presents a complex landscape requiring careful balancing and considerations. But what makes the topic even more difficult is the differing approaches between the United States, European Union, and United Kingdom. In the United States, there is no exemption from the antitrust laws for ESG initiatives, and enforcers have explicitly stated that they will not hesitate to take action against collaborations they deem anti-competitive.
The United States’ cautious approach errs on the side of scrutiny, even in the context of ESG goals. Conversely, the EU and UK have adopted more lenient approaches, actively encouraging ESG collaborations and providing guidance to avoid antitrust concerns.
The EU recently introduced a new section on sustainability agreements in its regulations recognizing their potential pro-competitive benefits. Some member state antitrust agencies have also taken a more lenient approach to competitor collaborations and/or have published specific guidance (e.g., the Netherlands, Austria, Germany’s latest FCO decision in Plant Tray).
The European Commission’s Horizontal Guidelines give four examples of agreements unlikely to run afoul of competition law:
The guidelines also create a “soft safe harbour” for sustainability standardization agreements, subject to certain conditions. However, all other agreements are subject to classic antitrust rules.
Similar to actions taken in the EU, the UK Competition and Markets Authority (CMA) published its Green Agreements Guidance in October 2023 following extensive stakeholder consultation. This UK guidance provides insight into how the CMA intends to apply competition law to environmental sustainability agreements, defined as those “aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment or assist with the transition towards environmental sustainability.” While “environmental sustainability” includes improvements to air quality or the conservation of biodiversity, agreements that pursue wider eco-societal objectives are not covered.
Notably, the guidance states the CMA will not enforce competition law against those environmental sustainability agreements that “reduce the negative externalities arising from greenhouse gases,” referred to as climate change agreements. The guidance provides a framework for assessing such climate change agreements, considering the impact on competition and market dynamics, and offers an open-door policy for businesses seeking informal guidance to navigate potential legal pitfalls.
The burden of proof rests on businesses wishing to rely on the exemption, which must exercise care and caution in describing and quantifying the anticipated benefits of an agreement to avoid the risk of greenwashing.
While the CMA guidance is nonbinding, businesses seeking (and complying with) informal guidance from the CMA will receive protection from enforcement actions and/or fines, including protection for directors from disqualification orders. Such protection will not, however, insulate those companies against potential actions for damages from third parties (competitors, consumers, or suppliers) alleging that the agreement is anti-competitive and caused them harm.
Divergent approaches across jurisdictions may create challenges for companies operating in both regions, necessitating careful navigation of varying regulations and guidelines.
The intersection of ESG goals and antitrust laws presents a complex challenge for firms and their counsel. By establishing clear frameworks for collaboration, adhering to established guidelines, and carefully considering the competitive implications of their actions, companies can work toward achieving their sustainability objectives while mitigating legal risks.
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